July 3, 2017 / 7:47 AM / 2 months ago

Fitch Affirms eHi at 'BB-'; Outlook Revised to Negative

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, July 03 (Fitch) Fitch Ratings has affirmed China-based car rental and services operator eHi Car Services Limited's Long-Term Issuer Default Rating (IDR), senior unsecured rating and the rating of eHi's outstanding USD200 million 7.5% senior notes due 2018 affirmed at 'BB-'. The Outlook is revised to Negative from Stable. The Outlook revision reflects the company's higher leverage, ongoing capex requirements and Fitch's expectation that deleveraging is not probable in the next few years. KEY RATING DRIVERS Rising Leverage: Fitch expects eHi's FFO-adjusted net leverage to remain above 3.0x over the next few years, even though the company is starting to moderate its expansion and capex plans for 2017. eHi's FFO-adjusted net leverage rose sharply to 3.4x in 2016, from just 0.8x at end-2015, due to higher-than-Fitch-expected net capital expenditure for vehicle fleet expansion, despite strong growth in EBITDA and FFO. Capex to Moderate: Fitch expects eHi to slow capital expenditure in 2017, following capex of CNY3.7 billion in 2016. The company is exploring financing options to lower its cash outlay on vehicle purchases. eHi's capex is also constrained by covenants on its syndicated loan, which require that total debt/EBITDA falls below 3.5x by end-2017. National Expansion, Market Leader: eHi remains one of China's leading car rental companies, with majority market share in Shanghai and eastern China. Its total fleet size rose by 50% to 56,916 vehicles and total revenue increased by 45% to CNY2.1 billion in 2016. eHi also expanded its geographical footprint to cover 216 cities. Fitch expects eHi to continue expanding and for its fleet size to reach almost 67,000 vehicles by end-2017. The company has also narrowed the gap between itself and the market leader, CAR Inc. (BB/Negative), over the previous two years, with faster revenue and fleet expansion. Competitive Pressure, Regulatory Risk: China's car rental and services market continues to change rapidly. eHi faces fierce competition, particularly from CAR Inc., which cut its prices at the beginning of 2017. This has not directly affected eHi's margins so far, but may pressure its pricing and profitability if it continues. China's regulatory framework is also evolving and some changes may adversely affect eHi's operations. DERIVATION SUMMARY eHi has a smaller operating scale and weaker financial profile than other Fitch-rated car rental operators, such as CAR Inc., China's largest car rental operator, and Localiza Rent a Car S.A. (BB+/Negative), Brazil's leading rental car operator. However eHi has lower concentration risk compared with CAR Inc., which is exposed to one large customer. No Country Ceiling, parent/subsidiary or operating environment aspects have an impact on the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 20,000 vehicles added and 10,000 vehicles disposed in 2017 - 37% revenue growth in 2017, then 4%-12% in 2018-2020 (2016: 45%) - EBITDA margin of 45%-47% in 2017-2020 (2016: 44%) RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to the Outlook being revised to Stable - FFO-adjusted net leverage sustained below 3.0x (2016: 3.4x) - EBITDA margin sustained above 50% Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO-adjusted net leverage above 3.0x for a sustained period - FFO fixed-charge coverage below 3.0x for a sustained period (2016: 3.8x) - EBITDA margin below 40% for a sustained period LIQUIDITY Satisfactory Liquidity: eHi has sufficient liquidity, with CNY787 million of cash and cash equivalents and CNY63 million in undrawn loan facilities at end-2016. We expect the company to successfully roll over its domestic bank loans. However, eHi has CNY2.3 billion in debt maturing in 2018, including the USD200 million bond and 60% of the USD150 million syndicated loan. Liquidity risk will increase if the company fails to address its refinancing needs by end-2017. eHi signed a five-year framework agreement with China Development Bank Corporation (A+/Stable) in 2015, which covers various financing products for an aggregate amount CNY1.5 billion, of which CNY218 million had been drawn at end-2016. Some of these products are restricted for specific purposes, such as new vehicle purchases, but may nonetheless provide an additional source of liquidity. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Li Chen Analyst +86 21 5097 3009 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments: Gains and losses on disposal of used vehicles and share-based compensation is excluded from the EBITDA calculation. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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