Hong Kong, September 14, 2018 -- Moody's Investors Service has changed to positive from stable the
outlook for China Grand Automotive Services Co., Ltd.'s
B1 corporate family rating. Moody's has also affirmed the
same B1 rating.
RATINGS RATIONALE
"The positive rating outlook reflects China Grand Auto's strong business
profile, which position the company strongly as its B1 rating level
when compared with global auto dealer peers," says Gerwin
Ho, a Moody's Vice President and Senior Credit Officer.
Moody's says China Grand Auto's strong business profile is
demonstrated by its leading position in China's auto dealership
market, large dealership network, brand diversity, and
broad geographic coverage.
China Grand Auto was the largest auto dealer in China by revenue and unit
sales in 2017, according to the China Automobile Dealers Association.
The company posted revenue totaling RMB78 billion and new vehicle sales
of about 404,214 units, representing 3.4% of
China's passenger vehicle unit sales in 1H 2018.
The company operated in 837 locations at 30 June 2018, including
771 4S (sales, spare parts, services and survey) dealership
stores, covering 57 brands. Headquartered in Shanghai,
it maintains a presence in 28 regions across China, with particularly
strong market positions in West and Central China.
China Grand Auto has been growing its service-related revenues
over the past few years, including from auto maintenance,
commissions and auto leasing. Such revenues accounted for 15%
of the company's total revenues in 1H 2018.
The gross margins for its service-related operations are higher
than for new vehicle sales and, as such, accounted for the
majority of gross profit, in particular, with auto maintenance
contributing 32% of gross profit in 1H 2018.
Moody's believes the company will continue to grow its service-related
revenues, including auto maintenance, supported by its large
and growing customer base.
"Moody's also expects China Grand Auto to manage its growth,
both through organic and acquisition means, while maintaining a
prudent financial policy that will result in a steadily improving leverage
and good interest coverage," adds Ho, who is also Moody's
Lead Analyst for China Grand Auto.
As mentioned, China Grand Auto operated 771 4S dealership stores
at 30 June 2018. This number represents an increase from the 405
at the end of 2013. The company grows its store network through
opening new stores and acquisitions, including from the acquisition
of Hong Kong-listed Grand Baoxin Auto Group Limited in June 2016.
China Grand Auto's good growth and exposure to auto leasing, however,
raise significant funding needs. As such, any weakening in
its ability to secure banking facilities for working capital purposes
or maintain its diversified funding channels — including through
public equity or domestic and offshore bond issuance — will limit
its growth. Moody's expects adjusted debt to reach around RMB63
billion by the end of 2018, up from approximately RMB58 billion
at the end of 2017.
China Grand Auto's debt leverage — as measured by adjusted debt/EBITDA
— registered about 5.9x in the last 12 months ending 30 June
2018. Moody's expects that the ratio will moderate to around 5.7x
over the next 12-18 months, which is an improvement from
the 6.7x in 2016.
EBITDA/interest should stay healthy at around 3.4x over the next
12-18 months versus about 3.5x in the last 12 months ending
30 June 2018; driven by rising EBITDA, as China Grand Auto's
revenue scale expands and the company shows steady profitability,
due to the share of its higher margin service-related revenues
rising to offset pressure on margins for new vehicle sales.
China Grand Auto's liquidity is moderate. At 30 June 2018,
its restricted and unrestricted cash of RMB15 billion was insufficient
to cover its short-term debt of RMB34 billion.
Nonetheless, Moody's expects that the company will be able
to rollover its debt with domestic banks, given its profitable operations,
strong market position, and inventory of branded cars.
The company also demonstrates a track record of access to diversified
funding channels, including onshore debt instruments such as corporate
bonds, medium-term notes, and asset-backed securities.
China Grand Auto's B1 rating reflects the company's strong business
profile and rising exposure to higher margin service-related revenues.
China Grand Auto's B1 rating is constrained by its moderately high debt
leverage, which stems from its acquisitive growth, reliance
on short-term financing, and exposure to regulatory risk.
The company faces regulatory risks related to vehicle ownership controls,
vehicle fuel economy and emission standards, as well as with regard
to its financial services and used vehicle sales. Any further tightening
of related regulations could slow the company's sales.
Upward rating pressure could emerge, if China Grand Auto continues
to maintain its business profile, maintain access to diversified
funding sources, and be able to refinance its short-term
debt, while improving these two factors: (1) its debt leverage;
and (2) the contribution of revenue and gross profit from its auto maintenance
business on a sustained basis.
Credit metrics indicative of upward rating pressure include adjusted debt/EBITDA
trending towards 5.0x-5.5x and interest coverage
as measured by EBITDA/interest exceeding 3x on a sustained basis.
On the other hand, the rating outlook could return to stable if:
(1) The company's business profile weakens;
(2) Revenue and/or margins decline, due to deteriorating market
conditions, or the termination of contracts with vehicle suppliers;
(3) The company is unable to increase revenue and gross profit contributions
from its auto maintenance business;
(4) Its liquidity position or funding access weakens; or
(5) It fails to maintain its interest coverage — as measured by
EBITDA/interest — above 3x or improve its leverage such that leverage
trends towards 5.0-5.5x over the next 12-18
months.
The principal methodology used in this rating was Retail Industry published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Established in 2006, China Grand Automotive Services Co.,
Ltd. is listed on the Shanghai Stock Exchange and was 32.8%
owned by the unlisted Xinjiang Guanghui Industry Investment Group Co.,
Ltd. (B2 stable) at 30 June 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
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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.
Gerwin Ho
VP - Senior Credit Officer
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
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
