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Rating Action:

Moody's changes outlook on China Grand Auto's B1 rating to stable

 The document has been translated in other languages

23 Sep 2019

Hong Kong, September 23, 2019 -- Moody's Investors Service has changed the outlook on China Grand Automotive Services Group Co., Ltd (China Grand Auto) to stable from positive.

At the same time, Moody's has affirmed the company's B1 corporate family rating (CFR).

RATINGS RATIONALE

"The change in outlook to stable reflects our view that China Grand Auto's leverage will remain around 5.5x-6.0x over the next 12-18 months, due to a weak operating environment and its continued reliance on short-term financing, but that this level is still appropriate for its B1 rating," says Roy Zhang, a Moody's Assistant Vice President and Analyst.

"Our affirmation of the company's B1 rating reflects its strong business profile and rising ability to tap into revenues from higher margin services," adds Zhang.

China's overall auto sales declined by 12.4% in 1H2019 according to the China Association of Automobile Manufacturers. This weak operating environment will have a negative impact on China Grand Auto's business performance.

Moody's expects China Grand Auto's leverage to remain around 5.5x-6.0x over the next 12-18 months compared with 5.9x at the end of 2018, reflecting slower earnings growth and stable debt when compared with 2018.

However, China Grand Auto has proven its business resilience during current industry downturn. Its year-on-year unit sales of new vehicles grew by 6.1% and revenue grew by 3% in 1H2019, despite declining auto sales in China. Moody's believes this strong performance is underpinned by the company's large and diversified operating scale and favorable brand exposure to high-end markets. These strengths, combined with increasing profit contributions from high-margin services and commission-based business, have all improved the company's operating stability.

At the same time, China Grand Auto has a high reliance on short-term debt, resulting in a weak liquidity profile.

The company's reported interest expense increased by 13% in 1H2019, due to higher funding costs amid a tight funding environment. Moody's expects the company's financing cost to keep rising as it refinances its existing debt at higher interest rates.

China Grand Auto's liquidity is weak. At 30 June 2019, its restricted and unrestricted cash pool of RMB20.3 billion was insufficient to cover its short-term debt of RMB61 billion.

However, Moody's expects that the company will be able to roll over its debt with new funding from domestic banks, given its profitable operations, strong market position and inventory of branded cars.

The company has also demonstrated a track record of access to diversified funding channels, including onshore debt instruments such as corporate bonds, medium-term notes, and asset-backed securities.

In addition, its strategic relationships with auto makers and highly liquid working capital provides it with a buffer against liquidity needs.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

The company is benefiting from the social trend of increasing car ownership in China. This trend is supported by China's improving infrastructure, rising disposable income and urbanization rate.

The company faces regulatory risks related to vehicle ownership controls, vehicle fuel economy and emission standards, as well as risks stemming from its financial services and used-vehicle sales. Any further tightening of related regulations could hamper the company's sales.

China Grand Auto's ownership is concentrated in Xinjiang Guanghui Industry Investment Group Co., Ltd (B2 stable), which held a 32.64% stake in the company at end the of June 2019. This risk is somewhat mitigated by the fact that China Grand Auto is a listed and regulated entity with minimal intercompany transactions with Xinjiang Guanghui.

Upward rating pressure could emerge if China Grand Auto maintains its business profile and access to diversified funding sources, and refinances 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 3.0x on a sustained basis.

On the other hand, downward rating pressure could emerge if (1) the company's business profile weakens; (2) its revenue and/or margins decline due to deteriorating market conditions or the termination of contracts with vehicle suppliers; (3) its liquidity position or funding access weakens; or (4) its interest coverage — as measured by EBITDA/interest — falls below 2.5x, or its leverage rises above 6.0x on a sustained basis.

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 Group Co., Ltd is listed on the Shanghai Stock Exchange and was 32.64% owned by the unlisted Xinjiang Guanghui Industry Investment Group Co., Ltd (B2 stable) at June 30, 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Roy Zhang
Asst Vice President - 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
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
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

No Related Data.
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