Hong Kong, February 03, 2015 -- Moody's Investors Service has downgraded China Automation Group Limited's
corporate family and senior unsecured bond ratings to B1 from Ba3.
The ratings outlook is stable.
The rating action follows the company's profit warning on 29 January
for its 2014 full-year results.
RATINGS RATIONALE
"The ratings downgrade primarily reflects China Automation's weaker growth
prospects and our concerns over the quality of its receivables,"
says Chenyi Lu, a Moody's Vice President and Senior Analyst.
According to the company, the deterioration in its performance was
largely driven by: (1) weak economic growth in China and lower oil
prices leading to soft demand from the petrochemical and coal chemical
industries, two of its key end-markets; (2) foreign
exchange losses; and (3) an increase in net bad debt expenses from
RMB60 million in 2013. The company incurred such sizeable bad debt
expenses for the consecutive three years since 2012.
Moody's expects the challenging operating environment for its main
end-markets to persist over the next 1-2 years, leading
to a low single-digit decline in its annual revenue growth.
This situation should also keep its profitability low.
Moody's also notes that China Automation increasingly relies on
the petrochemical and coal chemical industries for revenue generation,
a credit negative given the current tough conditions in both sectors.
The two industries accounted for 76% of its total revenue in 1H
2014, up from 53% in 2011.
In addition, the persistence of sizeable bad debt expenses over
the last few years raises questions about the quality of China Automation's
trade receivables. Moody's expects the company's receivables
days will remain lengthy, in turn pressuring its operating cash
flow and constraining its ability to deleverage.
Given the weak revenue growth and cash flow, Moody's expects
China Automation's adjusted debt/EBITDA to remain elevated at about
4.5x over the next 12-18 months, slightly down from
an estimated 4.6x for 2014. This level of leverage is more
consistent with the B1 rating category.
China Automation's B1 corporate family rating continues to reflect its
leading position in providing safety and critical control systems to the
Chinese petrochemical and railway sectors.
These strengths are counterbalanced by its small scale and weak and volatile
cash flows, due to its high working capital requirements.
In terms of liquidity, China Automation has sizeable debt of RMB1.2
billion maturing in April 2016, which moderately exceeds its cash
holdings and committed back-up credit facilities. However,
Moody's expects the company will be able to fund such shortfall
in the financial markets given its established market position and banking
relationships.
The stable rating outlook reflects Moody's expectations that China Automation
will maintain its robust market share and stable key financial metrics.
Upward pressure on the ratings could emerge over the medium term if the
company: (1) reduces its debt by containing its working capital
requirements to a moderate level; and (2) improves its profitability,
such that its adjusted debt/EBITDA stays below 3.7x-4.0x
and adjusted EBITDA/interest exceeds 3.0x on a sustained basis.
The ratings could be downgraded if: (1) the company's market position
weakens materially; (2) its profitability is pressured further;
(3) its liquidity position deteriorates significantly; and/or (4)
its debt leverage increases materially due to aggressive acquisitions
or increased working capital deficits.
Financial metrics that we would consider for a downgrade include debt/EBITDA
exceeding 5.0x-5.5x, and adjusted EBITDA/interest
below 2.0x-2.2x on a sustained basis.
The principal methodology used in this rating was Global Manufacturing
Companies published in July 2014. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
China Automation Group Limited specializes in providing safety and critical
control systems for the railways signaling and petrochemicals industries
in China.
The company began its operations in 1999 and was listed on the Main Board
of the Stock Exchange of Hong Kong Limited in July 2007. Its three
founders collectively owned 44.89% of the firm at end-2013.
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.
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.
Chenyi Lu
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 downgrades China Automation to B1; outlook stable