Fitch Downgrades Zoomlion to 'B-'; Outlook Stable
Fitch has also downgraded the company's senior unsecured rating to 'B-' from 'B+', with a Recovery Rating of 'RR4'. Bonds issued by Zoomlion H. K. SPV Co. Ltd have also been downgraded to 'B-' from 'B+', with a Recovery Rating of 'RR4'.
The two-notch downgrade reflects the rapid deterioration in Zoomlion's financial profile, with sustained high leverage and poor coverage ratios. Fitch does not expect Zoomlion to deleverage quickly in the medium term. The Stable Outlook reflects the resources and access that Zoomlion still has that Fitch deems to be sufficient to sustain its liquidity.
KEY RATING DRIVERS
Business Profile Change: Zoomlion's business profile has shifted quickly in the past few years. Revenue from construction machinery shrank by 75% from the peak in 2013 due to weak market demand, and in 1H16 accounted for only 53% of total revenue. More stable environmental and agricultural machinery sales made up another 45% of revenue. EBITDA margin halved from over 20% during the peak to close to 10% in 2015. We believe anaemic demand for new construction machinery will continue to keep margin and sale volume thin. Zoomlion's earnings may be less volatile in the future as the environmental and agricultural machinery segment accounts for a larger share of its revenue while the share of the construction machinery business dwindles.
Balance Sheet Weakened Rapidly: The company's net debt position expanded to CNY23.6bn in 1H16, compared to its trailing twelve month (TTM) revenue of CNY19.1bn and EBITDA of CNY1.9bn. Net debt to EBITDA ratio surged to 12.2x at end-1H16 from 10.1x in 2015 due to the shrinking operating scale. Fitch does not expect the ratio to decrease to less than 6x in the medium term, which is a key constraint on Zoomlion's rating.
High Working Capital Needs: Total working capital increased to CNY47.0bn or 246% of TTM revenue in 1H16, from CNY45.6bn or 221% of revenue in 2015 and CNY29.9bn or 78% of revenue in 2013. Despite of tightening sales terms and greater effort in collection, Zoomlion has found it difficult to reduce working capital. In addition, we believe Zoomlion would have additional working capital needs to develop its environmental and agricultural machinery business. Therefore, we no longer believe Zoomlion will be able to deleverage quickly through working capital reduction.
Liquidity Not An Immediate Concern: Zoomlion has CNY15.4bn short-term debt due within one year. It has CNY11.2bn cash on hand. Zoomlion, as the industry leader, still has good access to banking facilities and the capital markets. In 1H16, Zoomlion was able to refinance its debt at a reasonable funding cost. Therefore, we do not see any near-term issue with its liquidity.
Fitch's key assumptions within our rating case for the issuer include:
- No material working capital reduction in the next three years
- Revenue to shrink 15% in 2016, and increase by 5% in 2017 and 10% in 2018
- EBITDA margin to be stable at 10%
- Total capex to be less that CNY2bn in the next three years
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Material reduction in working capital
- Sustained improvement in FFO adjusted net leverage (2015: 16.7x)
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Increasing liquidity pressure