OREANDA-NEWS. Fitch Ratings has assigned a final rating of 'BB+' to the USD300m 6% senior unsecured notes due 2021 issued by CAR Inc. (CAR, BB+/Stable). This final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 3 August 2015.

The notes are rated at the same level as CAR's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

KEY RATING DRIVERS
Rapid Expansion Increases Leverage: Fitch expects CAR's FFO adjusted net leverage to increase to 2.8x by end-2015 from 0.9x at end-2014 due to a faster-than-expected fleet expansion. This expansion is driven by growing demand for short-term rentals and CAR's cooperation with UCAR, a chauffeured car service provider in which CAR owns a 10% stake. The risk posed by the higher leverage during this period of rapid growth is mitigated by the improved profitability that stems from better economies of scale. Fitch estimates CAR would quadruple its EBITDA to USD1bn by end-2017; with EBITDA margin improving to above 50% in the next 24 months from 45.4% in 2014.

Enhanced Business Profile: Fitch sees strong market potential for the chauffeured car service industry in China, with growth driven by demand for premium and differentiated transportation services from high-end customers. CAR expects to generate up to 40% of its EBITDA from long-term rentals, which provide more predictable income, by end-2016 through its collaboration with UCAR. Furthermore, CAR will deploy its idle vehicles to UCAR for use in short-term chauffeured services. The tie-up will provide CAR with strong synergies because the company will be able to optimise use of its short-term rental cars during weekdays, which will enhance profitability.

Increased Regulation Supports Development: Fitch believes a regulated chauffeured car service market is potentially negative for taxi-hailing apps such as Didi and Uber. These apps are major competitors to UCAR, which has been operating within China's legal framework since it started formal operations in January 2015. Fitch also believes CAR, as the leading car rental company in China, would continue to play an important role in standardising and promoting best practices for the industry. According to Caijing business news website, China's Ministry of Transport is planning to issue new rules to regulate the chauffeured car service market sometime in 2015. The rules could reshape the use of mobile-enabled chauffeured services, and regulate the use of unlicensed private cars and drivers and promotions that offer services at below operating cost by chauffeured car services.

Operational and Financial Flexibility: CAR has no minimum purchase commitments with car manufacturers. In addition, it has the choice to postpone fleet renewal by adding fewer new cars or disposing more used cars during downturns. Operationally, it has reduced its long-term store rental expenses by increasing the number of pick-up points - parking facilities with simple service stands - instead of full storefronts. All the car parks have flexible lease termination arrangements. These factors give CAR full flexibility to adjust operations during downturns.

Market Leader, Strong Profile: CAR is the No.1 car rental company in China with 31% share of the short-term self-drive market as at end-2013. Consulting company Roland Berger expects the Chinese car rental industry to grow at more than 20% a year into 2018, with existing players having the advantage of high entry barriers due to capital intensity, high funding needs and restrictions on vehicle license plates by the Chinese government. CAR has significant first-mover advantage over its peers: it has a fleet size that is four times that of the second-largest player; more than 100 vehicle models to meet different rental needs; a wide geographic spread covering 70 major cities; a lower cost structure than its competitors; a dynamic pricing system; and a strong distribution channel to dispose of its used cars.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Rental fleet size to expand at 37% compounded annual growth rate till 2018 to satisfy continued growth in market demand;
- Average daily rental rate to be stable at CNY270 per day;
- Utilisation rate to gradually increase to above 66% by 2017;
- Short-term rental cars depreciated over 2.5 years and long-term rental cars over three years.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:

- FFO adjusted net leverage exceeds 3.0x during the high growth stage
- EBITDA margin sustained below 45%
- EBIT margin sustained below 20% (FY14: 25.2%)
- Loss of dominant market share in the car rental industry
- Evidence of greater regulatory or legal intervention leading to an adverse change in the company's operation and business profile

Positive: Future developments that may, individually or collectively, lead to positive rating actions include:

- A more mature regulatory environment in the car rental business
- Longer track record of sustained fleet renewal cycle
- Maintenance of strong financial profile during the growth phase.