Fitch Downgrades BAIC Group to 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has downgraded Beijing Automotive Group Co Ltd's (BAIC Group) Long-Term Issuer-Default Rating (IDR) to 'BBB+' from 'A-', Outlook Stable. Fitch has also downgraded the company's senior unsecured rating and the ratings of bonds issued by BAIC Inalfa HK Investment Co., Limited and guaranteed by BAIC Group to 'BBB+' from 'A-'.
The downgrade reflects BAIC Group's deteriorating financial profile. Its proportionately consolidated FFO-adjusted-net-leverage surged to about 3.3x at end-2015, from 1.7x in the previous year, and its proprietary brand operation recorded increased losses and significant cash outflow on large capex and increased working capital.
The Stable Outlook reflects Fitch's expectation that BAIC Group will reduce its leverage by improving operations.
This will be achieved by rapidly growing sales from one of its joint ventures, Beijing Benz Automotive Co., Ltd. (Beijing Benz), while narrowing its proprietary brand losses and capital injection.
BAIC Group's rating incorporates a three-notch uplift from its standalone credit profile of 'BB+', reflecting strong 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.
KEY RATING DRIVERS
Weakened Financial Profile: Fitch assesses BAIC Group's financial profile on a proportionate consolidation 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 group holding company's weaker financial profile and non-listed operations. BAIC Group's proportionately consolidated EBIT margin declined to 3.5% in 2015 (2014: 4.7%) and FFO-adjusted-net-leverage rose to 3.3x (2014: 1.7x). The company's weak financial profile is its key ratings constraint.
Deleveraging Plan: BAIC Group has communicated a deleveraging plan, which includes operating improvements and equity issuance. With solid growth momentum and a strong product pipeline, Fitch believes Beijing Benz could see higher margins and increase its cash-flow contribution to BAIC Group. Fitch expects narrower losses from the proprietary brand operation as the company replaces its loss-making sedan models with SUV's in 2016. Moreover, BAIC Group's management expects government subsidies and equity issuance to improve its leverage ratio. Fitch says the plan's success depends on management execution and equity market stability.
Decelerating Auto Sales Growth: Fitch expects China's auto-sales growth to decelerate to mid-single digits until 2020, while capacity is still growing rapidly. Intensifying competition would weigh on industry-wide margins. This can already be seen in the commercial vehicle and sedan sub-segments. SUVs are the only positive segment, but also to face declining margins 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 10.1% of the market by sales volume in 2015. Passenger vehicles accounted for about 80% of BAIC Group's sales volume in 2015, while commercial vehicles account for about 20%. BAIC Group has a well-diversified passenger vehicle portfolio, with a variety of large, mid-sized, compact and small sedans, as well as SUVs, and MPVs to meet customer demand from mainstream and premium market segments.
Strong Government Support: The Beijing Municipal Government provides BAIC Group with strong 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 and sources the majority of its electric vehicle procurements, including 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.
Improving Dividend Sources: BAIC Group will have a more balanced dividend income when Beijing Benz starts paying half of its 2015 net profit as a dividend. In the past, BAIC Group's main dividend source was Beijing Hyundai. Fitch expects Beijing Benz's dividend to rise in the next three years, as the company increases sales and reduces capex.
- Capex not exceeding 14.0bn each year from 2016 to 2018 under the accounting treatment of proportionate consolidation of BJ Benz and BJ Hyundai
- Beijing Benz and Beijing Hyundai to maintain existing dividend payout ratios
- Improving Beijing Benz and proprietary brand operation margins from 2016 to 2018
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- significant improvement in BAIC Group's competitive market position, including a sustained increase in the market share of BJ Benz and BJ Hyundai and the proprietary brand operation increasing scale and profitability
- FFO-adjusted-net-leverage staying below 2.0x on a sustained basis, under the accounting treatment of proportionate consolidation of BJ Benz and BJ Hyundai
- improving linkages with Beijing Municipal Government
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- sustained business-profile deterioration, including material adverse regulatory developments and sustained negative gross profit making of the proprietary brand operation
- FFO-adjusted-net-leverage staying above 3.0x on a sustained basis, under the accounting treatment of proportionate consolidation of BJ Benz and BJ Hyundai
- weakening linkages with Beijing Municipal Government