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Rating Action:

Moody's assigns first-time Ba3 ratings to Tianneng Power

 The document has been translated in other languages

19 Mar 2013

Hong Kong, March 19, 2013 -- Moody's Investors Service has assigned a first-time Ba3 corporate family rating to Tianneng Power International Limited and a Ba3 senior unsecured debt rating to its proposed USD notes.

The ratings outlook is stable.

RATINGS RATIONALE

"The Ba3 rating reflects Tianneng Power's established track record in the industry, strong industry position, good brand name, and extensive distribution network," says Jiming Zou, a Moody's Analyst, and the International Lead Analyst for Tianneng Power.

Founded in 1986, the company is among the top manufacturers of lead acid batteries for electric bicycles in China, and serves both primary market addressing new vehicle installation and secondary market addressing demand from replacement.

Its large scale which supports its strong market position, includes an annual production capacity of 80 million units from eight facilities in four provinces.

Its strong brand name -- which is especially important for the secondary market -- is reinforced by its large network of 1,314 distributors, serving 80,000 sales points, across China.

"The sizeable extent of the electric bicycle market in China, which supports Tianneng Power's business growth in the medium term, is also a driver of the company's ratings," says Zou.

Tianneng Power enjoyed strong sales growth in the last 4 years when sales increased by more than 300%. According to the China Automotive Technology & Research Center, electric bicycle ownership in China was around 140 million units at end-2012.

Their popularity is likely to continue because they are affordable, environmentally friendly, energy efficient, and suitable for traffic-congested urban areas.

"The ratings have factored in Tianneng Power's competitive position and relatively high operating standards in an industry where the government is seeking consolidation," says Ping Luo, a Moody's Vice President and Senior Analyst.

Tianneng Power's sales growth in the past few years has been helped by government measures to close manufacturing facilities below environmental standards. According to the Ministry of Environmental Protection in China, about 1,500 plants closed or stopped production in the last 2 years.

In contrast, Tianneng Power -- which is able to meet the standards -- has taken over some of the market shares of the eliminated players.

"Furthermore, despite high growth, the company has sustained a strong financial profile which supports its Ba3 rating" says Luo, who is also the Local Market Analyst for Tianneng Power.

Tianneng Power showed a strong financial profile from 2009 to 1H 2012 with debt/EBITDA below 2x and EBITDA/interest well above 10x.

Moody's notes that it will need to expand capacity to manage its larger market share, thereby increasing debt leverage. If it maintains a disciplined approach to expansion, then its credit metrics -- debt/EBITDA at 2x - 3x, and EBITDA/interest at 5.5x -7.5x in the next two years -- will continue to support the company's Ba3 rating.

"At the same time, the Ba3 also reflects single-product risk," says Luo.

Tianneng Power's sales of lead acid batteries for electric bicycles account for over 90% of its revenue. Any change in government policy over the use of electric bicycles or the emergence of new affordable batteries could challenge its business and market position.

Moody's believes that the current large number of electric bicycle users, who include many in low-income groups, may make it difficult for the authorities to eliminate such vehicles until an alternative is available. In addition, they have a strong advantage in that they do not generate pollution.

Tianneng Power continues to spend on research and development. Thus, it is appropriately managing the obsolescent risk of lead acid batteries.

The Ba3 rating also considers the challenges for its operations and costs from stricter environmental measures and the cyclical lead price.

Tianneng Power shows a weak capital structure with a high level of short-term debt -- over 90% of total debt in December 2012 -- thereby exposing the company to high refinancing risk.

In addition, its fast expansion has resulted in large working capital requirements that pressure operating cash flow. Thus, its liquidity position is weak.

But Moody's expects the company to refinance its maturing domestic borrowings, given its strong market position and track record of profitable operations. Its proposed notes issuance will also strengthen its liquidity position.

Tianneng Power has aggregate secured debt and subsidiary debt that exceed 15% of its total assets -- 39% in June 2012 -- meaning that subordination risk is high for unsecured debt at the parent company level.

But it plans to use part of the proceeds from the proposed USD notes to reduce subsidiary debt, such that priority debts will fall to 15% of total assets. Thus, Moody's has not applied notching to the notes. Should it not achieve this reduction in subsidiary debt, then the rating of the notes would be under downward pressure.

The rating outlook is stable, based upon Moody's expectation that Tianneng Power maintains a strong market position, exercises a disciplined approach to expansion and can refinance its domestic short-term debts.

Upward rating pressure is limited in the near term due to the company's current weak capital structure and lack of product diversity. However, positive rating pressure could arise if the company (1) improves its liquidity position through reducing its refinancing risk and improving its working capital management; (2) maintains its strong market position; (3) increases product diversity; and (4) maintains a stable financial profile, while also expanding.

On the other hand, downward rating pressure could emerge if the company (1) shows weak liquidity -- a declining cash balance and no improvement in its capital structure; (2) suffers declining sales or profit margins; (3) fails to comply with government environmental standards; or (4) engages in aggressive debt-funded acquisitions or expansion, therefore impairing its financial position.

Credit metrics indicating downgrade pressure include debt/EBITDA above 4x -- 4.5x and EBITDA/Interest below 4.0x -- 4.5x on a consistent basis.

The principal methodology used in this rating was the Global Manufacturing Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Tianneng Power International Limited is principally engaged in the production and sale of lead acid batteries for electric bicycles. The company was founded in 1986 and is headquartered in Zhejiang, China. The company has been listed on the Hong Kong Stock Exchange since 2007.

The Local Market analyst for this rating is Ping Luo, +86 (10) 6319-6561.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Jiming Zou
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns first-time Ba3 ratings to Tianneng Power
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