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Fitch Affirms BAIC Group at 'BBB+'; Outlook Stable
May 25, 2017 / 6:26 AM / 7 months ago

Fitch Affirms BAIC Group at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, May 25 (Fitch) Fitch Ratings has affirmed Beijing Automotive Group Co Ltd's (BAIC Group) Long-Term Issuer-Default Rating (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the company's senior unsecured rating and the ratings of bonds issued by BAIC Inalfa HK Investment Co., Limited and guaranteed by BAIC Group at 'BBB+'. BAIC Group's rating incorporates a three-notch uplift from its standalone credit profile of 'BB+', reflecting moderate operational and strategic linkages with the Beijing Municipal Government. BAIC Group, which is 100% indirectly owned by the Beijing State-owned Assets Supervision and Administration Commission (Beijing SASAC), is the municipal government's sole vehicle for executing its development plan for the auto industry, the local economy's pillar industry. BAIC Group is Beijing's largest tax-payer and employs over 100,000 people, the majority being local residents. The Stable Outlook reflects Fitch's expectation that BAIC Group will maintain its leverage within our guideline. KEY RATING DRIVERS Financial Profile Constrains Rating: Fitch assesses BAIC Group's financial profile based on proportionate consolidation of the financial statements of the company's two joint ventures with Hyundai Motor Company (BBB+/Stable) and Daimler AG (A-/Stable). Its financial profile is supported by the joint ventures' solid profitability and consistent net cash positions, but these are offset by the proprietary operation's weaker financial profile. BAIC Group's proportionately consolidated EBIT margin rose to 4.0% in 2016 from 3.5% in 2015, and FFO-adjusted-net-leverage declined to 2.5x (2015: 3.3x). The company's financial profile is a key constraint on the rating. Benefit From Strong Benz Performance: Beijing Benz Automotive Co., Ltd.'s (Beijing Benz) sales volume increased by 27% in 2016 and it overtook Brilliance BMW to be the second-largest luxury car original equipment manufacturer (OEM) in China. Beijing Benz's gross margin expanded to 29.7% in 2016 from 25.2% in 2015. It now accounts for over 50% of BAIC Group's EBITDA. We expect Beijing Benz's market share to further expand, resulting in increasing revenue and rising margin. Beijing Benz has also started paying dividends to BAIC Group, diversifying the holding company's dividend sources. Strong Beijing Benz performance supports BAIC Group's credit profile. Increasing Net Debt: BAIC Group's deleveraging has been delayed by an increase in net debt to finance capex and other investments. The company had capex of CNY24 billion and spent CNY13 billion on other investments in 2016, which were not entirely met by a CNY25 billion equity injection and CNY9.1 billion from operating cash flow. Its net debt increased to CNY38.5 billion at end-2016 from CNY33.0bn a year earlier. We expect its net debt to continue to increase through to 2019. Decelerating Auto Sales Growth: Fitch expects China's auto-sales growth to decelerate to mid-single digits until 2020. Meanwhile the automaker's production capacity is still growing rapidly. Intensifying competition would weigh on margins in the industry. This can already be seen in the commercial vehicle and sedan sub-segments. SUVs are the only segment with strong demand growth, but margins in this segment are also likely to narrow as more manufacturers launch competing SUV models. Fitch expects BAIC Group to face more competition and margin pressure in the medium term. Major Auto Manufacturer: BAIC Group is China's fifth-largest auto manufacturer, with 10% of the market by sales volume in 2016. Passenger vehicles accounted for about 80% of BAIC Group's sales volume in 2016, while commercial vehicles made up the rest. BAIC Group has a well-diversified passenger vehicle portfolio, which includes large, mid-sized, compact and small sedans, SUVs and MPVs, to meet customer demand from the mass and premium market segments. Moderate Government Support: The Beijing Municipal Government provides BAIC Group with moderate policy and financial support, such as coordinating with regulatory authorities to establish the joint ventures with Hyundai Motor Company and Daimler AG and providing large capital injections and financial subsidies. The municipal government also purchases about half of BAIC Group's electric vehicles for use as taxis and government cars. Joint Ventures Lower Risk: Beijing Hyundai and Beijing Benz contribute close to half of BAIC Group's sales volume and are the group's core profit makers. The joint ventures manufacture the foreign partners' existing vehicle models and use their well-established brand names. The joint ventures incur limited research and development costs, bear relatively low product development and branding risk, and comply with more stringent overseas safety and environmental standards. DERIVATION SUMMARY BAIC Group's rating is based on a standalone rating of 'BB+' plus a three-notch uplift that reflects BAIC Group's moderate operational and strategic linkages with the Beijing Municipal Government. BAIC's multiple-JV structure and diversified brand and product portfolio lead to lower business risks than 'BB' category global peers, even though its scale is small and it lacks geographical diversification. BAIC's rating is mainly constrained by its relatively weak financial profile, in particular high leverage and negative cash flow contribution of its proprietary-brand operation. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Capex not exceeding CNY20 billion a year from 2017 to 2019 based on proportionate consolidation of the Beijing Hyundai and Beijing Benz financials - Beijing Benz and Beijing Hyundai to maintain existing dividend payout ratios - Beijing Benz's sales and operating margins to improve from 2017 to 2019 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Significant improvement in the group's competitive market position, including a sustained increase in the market share of Beijing Hyundai and Beijing Benz, as well as growing scale and profitability of the proprietary brand operation - FFO-adjusted net leverage sustained below 2.0x, based on proportionate consolidation of Beijing Hyundai and Beijing Benz Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Sustained deterioration of the business profile, including material adverse regulatory developments, or sustained gross losses in the proprietary brand operation - FFO-adjusted net leverage sustained above 3.0x, based on proportionate consolidation of Beijing Hyundai and Beijing Benz LIQUIDITY BAIC Group had CNY41 billion of cash and equivalents and unused banking facilities of CNY130 billion at end-2016. Total debt was CNY79 billion, including CNY43 billion of short-term debt. Contact: Primary Analyst Roy Zhang Associate Director +852 2263 9979 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Stella Wang Associate Director +86 21 5097 3026 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Proportionately consolidated financial statement is used to assess BAIC Group's financial profile. 51% of Beijing Benz's financial profile and 50% of BJ Hyundai's are consolidated into BAIC Group's adjusted financial statements. 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