Hong Kong, March 27, 2020 -- Moody's Investors Service has affirmed China Grand Automotive Services
Group Co., Ltd's (China Grand Auto) B1 corporate family
rating and the B1 senior unsecured debt ratings on the notes issued by
China Grand Automotive Services Limited and guaranteed by China Grand
Auto.
At the same time, Moody's has changed the outlook on the company's
ratings to negative from stable.
RATINGS RATIONALE
"The negative outlook reflects our expectation that China Grand
Auto's operating performance in 2020 will be weaker than we had
previously expected due to the coronavirus outbreak, stretching
its metrics and raising refinancing risk," says Roy Zhang,
a Moody's Assistant Vice President and Analyst.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. More specifically,
China Grand Auto's exposure to retail and discretionary consumption have
left it vulnerable to shifts in market sentiment, given its sensitivity
to consumer demand.
"That said, the impact is partially mitigated by China Grand
Auto's large scale and highly diversified auto dealer network in
China, resilient business model, and strong banking relationships,"
adds Zhang.
While new vehicle sales have started to recover as auto retailers resume
operation, Moody's expects slower economic growth and weaker
consumer confidence will affect auto demand in China. In the first
two months of 2020, the coronavirus outbreak and closure of retail
stores resulted in a 42% drop in China auto sales according to
the China Association of Automobile Manufacturers. This steep decline
follows an 8.2% drop in auto sales in 2019. Moody's
expects China Grand Auto's revenue will decline by 6.3%
in 2020 due to lower business volumes.
As the largest auto dealer in China by unit new car sales, China
Grand Auto has a diversified retail network across China and a balanced
brand exposure towards the high-end and luxury segments.
Moody's expects the company will benefit from industry consolidation
and be able to capture a good share of auto sales once demand recovers
in the second half of 2020 and 2021. The company's credit
profile also remained resilient through 2019, when auto demand was
weak in China.
Moreover, China Grand Auto's increasing profit contributions
from high-margin services and commission-based business
have improved operating stability. The company derived 67%
of its gross profit from these higher-margin segments in the first
half of 2019.
To help preserve capital for debt repayment, Moody's expects
China Grand Auto will tighten its sales and administrative cost,
reduce dividend payments and slow its pace of expansion. The company
repaid its USD400 million perpetual securities in December 2019 and USD300
million senior unsecured note in February 2020.
As a result, Moody's expects China Grand Auto's leverage,
as measured by total debt to EBITDA, to stay around 5.9x
in the next 12-18 months.
China Grand Auto relies heavily on short-term debt, resulting
in a weak liquidity profile. At 30 June 2019, its restricted
and unrestricted cash pool of RMB20.3 billion was insufficient
to cover its short-term debt. Moody's expects that the company's
financing cost will rise as it refinances its existing debt at higher
interest rates.
Nevertheless, Moody's expects the company will be able to roll over
its debt or meet its debt obligations, 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, syndicated loans
and asset-backed securities.
In addition, its strategic relationships with auto makers and highly
liquid working capital provide it with a buffer against its liquidity
needs.
The senior unsecured bond rating on the proposed USD notes is unaffected
by subordination to claims at the operating company level, because
such claims are not material, based on Moody's expectation that
the majority of claims will remain at the holding company level.
Creditors of China Grand Auto also benefit from the group's highly diversified
business profile — with cash flow generation across a large number
of operating subsidiaries — which mitigates structural subordination
risk.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. Today's action reflects the impact on
China Grand Auto of the breadth and severity of the shock, and the
broad deterioration in credit quality it has triggered.
In terms of governance risk, China Grand Auto's ownership is concentrated
in Xinjiang Guanghui Industry Investment (Group) Co., Ltd.
(B2 negative), which held a 32.73% stake in the company
at 21 September 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.
Moody's could change the outlook to stable if China Grand Auto maintains
its business profile and access to diversified funding sources,
improves its liquidity profile, and sustains its leverage below
6.0x.
On the other hand, Moody's could downgrade the ratings if
China Grand Auto's (1) business profile weakens; (2) revenue and/or
margins decline due to deteriorating market conditions or the termination
of contracts with vehicle suppliers; (3) liquidity position or funding
access weakens; or (4) 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 these ratings 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 negative) at 30 June 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
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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
