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Rating Action:

Moody's changes the outlook on China ZhengTong Auto Services' Ba3 rating to negative

 The document has been translated in other languages

01 Apr 2016

Hong Kong, April 01, 2016 -- Moody's Investors Service has changed to negative from stable the outlook for China ZhengTong Auto Services Holdings Limited's (ZhengTong) Ba3 corporate family rating.

Moody's has also affirmed ZhengTong's Ba3 corporate family rating.

RATINGS RATIONALE

"The negative rating outlook reflects ZhengTong's weakened credit metrics and the increase in execution and financial risks from its new auto finance business," says Gerwin Ho, a Moody's Vice President and Senior Analyst.

ZhengTong's results for the fiscal year ended 31 December 2015 were weaker when compared with its results for fiscal year 2014. Its sales fell by 5% year-on-year to RMB29.4 billion and inventory days on hand increased to 51 days from 45 days in 2014.

In addition, its total adjusted debt rose to about RMB9.3 billion, which represented a RMB1.8 billion increase versus the level seen at end-2014. Moody's estimates that about RMB1.4 billion of the increase in debt was related to the funding of its new auto finance business.

Excluding its auto finance business, the company's car dealership business showed an adjusted debt/EBITDA of around 3.9x and EBITDA/interest of around 3.6x in 2015; results which were worse than the 3.4x and 3.8x seen in 2014.

Moody's expects ZhengTong to see a nominal revenue growth in its car dealership business in 2016.

Moody's notes that ZhengTong's credit metrics in 2015 were weak for its Ba3 corporate family rating. Moody's does not expect this situation to improve substantially in the near term.

Moody's is also concerned over ZhengTong's new auto finance business because such operations are associated with increased execution and financial risks.

Moody's understands that the company's 95%-owned subsidiary, Shanghai Dongzheng Automotive Finance Co., Ltd. (SDAFC, unrated), is an auto financing joint venture with Dongfeng Motor Corporation (unrated). The joint venture began operations in April 2015. SDAFC's principal businesses include lending to both vehicle buyers and auto dealers.

ZhengTong does not have an established track record of managing an auto finance business.

SDAFC is currently the only auto finance company in China (Aa3 negative) that is primarily owned and operated by an auto dealer. SDAFC's ability to manage credit underwriting, monitoring, collection, repossession, charge-offs and recovery is yet to be proven. Any material bad debt or charge-offs in the auto finance business will impact directly ZhengTong's income statement, representing a new risk to ZhengTong.

ZhengTong has borrowed to fund SDAFC's business. Such funding reached RMB1.4 billion, representing 17% of ZhengTong's reported debt at end-2015. If SDAFC's business grows further, ZhengTong will be pressured to use its available bank credit facilities to support such growth. This situation will raise ZhengTong's overall debt levels, and the company's liquidity position will weaken.

ZhengTong's adjusted debt/EBITDA—including borrowings for financial services—rose to about 4.5x in 2015 from 3.4x in 2014. Such a situation leaves little buffer against its rating downgrade trigger of an adjusted debt/EBITDA in excess of 4.0x--4.5x.

ZhengTong's Ba3 rating reflects its: 1) strong position in China's fast-growing luxury car dealership market; 2) large network; 3) strong geographic coverage; and 4) diverse brand offerings.

The rating is also supported by its continued focus on luxury brands. This approach has led to solid growth in sales and stronger margins than those of low-end and middle-market brands.

However, ZhengTong's rating is constrained by the funding and execution risks arising from its rapid expansion and auto finance business, the intense competition in the car dealership industry in China, and the increasing but small contribution of its after-sales services business.

ZhengTong's liquidity profile is characterized by high refinancing risk, due to its small cash holdings when compared with its substantial amount of short-term debt. At end-2015, it held unrestricted cash totaling RMB1.6 billion versus short term debt of RMB5.7 billion.

Nonetheless, Moody's expects that the company will retain its ability to roll over its debt with domestic banks, given its profitable operations, strong market position, and inventory of globally branded luxury cars.

Rating upgrade pressure is limited, given the negative outlook. Nevertheless, the rating outlook could return to stable if ZhengTong can demonstrate an ability to: (1) lower its debt leverage such that its debt/EBITDA stays below 4.0x--4.5x; and (2) reduce the financial burden from its auto finance business.

Rating downgrade pressure could emerge if ZhengTong: (1) takes on further material debt-funded expansions or acquisitions; (2) faces revenue and/or margin declines due to lower operating efficiency, or deteriorating market conditions; or (3) fails to improve its debt maturity profile.

Credit metrics indicative of downgrade pressure would include debt/EBITDA in excess of 4.0x-4.5x and EBITDA/interest below 3.0x on a consistent basis.

The principal methodology used in this rating was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

China ZhengTong Auto Services Holdings Limited is a top auto dealership group in China. The company focuses primarily on the luxury and ultra-luxury car market. It operated 112 dealership stores in China at end-2015, and listed on the Hong Kong Stock Exchange in 2010.

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 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.

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.

Gerwin Ho
Vice President - Senior 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 changes the outlook on China ZhengTong Auto Services' Ba3 rating to negative
No Related Data.
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