Fitch Affirms Dongfeng Motor Group at 'A'; Outlook Stable
The affirmation follows Dongfeng's ability to maintain its market leadership and strong financial profile despite market weakness in 2015. We expect Dongfeng to sustain its stable performance through its diversified brand and product portfolio.
DFG's rating incorporates a three-notch uplift from its standalone credit profile of 'BBB', to reflect DFG's strong operational and strategic ties with the central government through its 66.86% parent Dongfeng Motor Corporation (DFM), which is a wholly owned subsidiary of the State-owned Assets Supervision and Administration Commission (SASAC).
In rating Dongfeng, we proportionately consolidate its joint ventures to better reflect its business profile.
KEY RATING DRIVERS
Stable Business Performance: DFM's revenue increased 15% to CNY249bn in 2015 while EBITDA rose 5.4% to CNY22.3bn, on a proportionately consolidated basis. The improvement was driven by faster growth of Dongfeng Honda, a joint venture with Japan-based Honda Motor Co., Ltd's (A/Stable), and its proprietary brand operation. In contrast, auto sales growth in China slowed to 4.7% in 2015 from 6.9% in 2014. DFM remains the second-largest player in China with 15.7% share of total vehicle sales in 2015 (2014: 16.2%).
Diversification Increases Stability: DFM operates through multiple JVs carrying different brands, including Honda, Nissan, Infiniti, Peugeot, Citroen, Renault and Kia. The brand diversification greatly reduces risks associated with customer preference, brand reputation and geo-politics. In terms of product offerings, DFM has a full range across various segments. In 2015 and 1H16, the strong performance of Japanese brands and the SUV segment offset weakness of in sedan segment.
Resilient JV Structure: In 2015, DFM received CNY9.7bn of dividends from four major JVs. This was sufficient to fulfil DFM's needs for capex and dividend payout. On a proportionately consolidated basis, DFM's net cash position increased to CNY42.2bn at end-2015, from CNY31.8bn end-2014. We expect all the major JVs to sustain their dividend payments to DFM given their healthy margins and net cash positions.
Strong Government Support: SASAC and the central government have demonstrated commitment to support DFM to become the flagship automobile company in China. Recent support includes capital injections and subsidies to help its proprietary brand and new energy vehicle development initiatives. We expect the moderate linkage between DFM and SASAC to continue as DFM is responsible for carrying out strategic missions for the central government in automotive industry development.
Rating Constraints: The ratings are constrained by DFM's limited geographical market diversification and weak proprietary brand operation. We expect DFM to rely on cash flow generated by its JVs in the medium term. Its business model limits its ability to grow beyond the domestic market until it can establish a competitive proprietary brand operation with strong brand recognition.
Fitch's key assumptions within our rating case for the issuer include:
- JV structure remains the major business model for foreign auto players to enter the Chinese market
- Top-line growth rate to remain at around mid-single digits
- Margin to decline slightly year over year in the next three years
- Dividend payout ratio to be around 8%-10%
Positive rating action is not expected in the medium term as it would require a major change in DFM's business profile, including global diversification and significant development of its proprietary brand operation.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Reduced support from the government, including material weaker linkage with the SASAC
- Sustained deterioration in the business profile, including material adverse regulatory developments
- DFM - excluding JVs - generates negative free cash flow on a sustained basis and/or fails to maintain its net cash position