OREANDA-NEWS. Fitch Ratings has assigned Beijing Automotive Group Co Ltd's (BAIC Group; A-/Stable) proposed euro-denominated bonds an expected 'A-(EXP)' rating.

The bonds are to be issued by BAIC Inalfa HK Investment Co., Limited, and unconditionally and irrevocably guaranteed by BAIC Group. The notes are rated at the same level as BAIC Group's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The final rating on the proposed notes is contingent upon the receipt of documents conforming to information already received.


Strong Government Support: The Beijing Municipal Government provides strong policy and financial support for BAIC Group, such as coordinating with different levels of regulatory authorities to facilitate the establishment of JVs with Hyundai Motor Company (BBB+/Stable) and Daimler AG (A-/Stable), and it has provided large amounts of capital injections and financial subsidies through the years. The municipal government is also responsible for buying about half of BAIC Group's electric vehicles; it sources more than 80% of its electric vehicle procurements, including taxis and public government cars, from BAIC Group.

Major Auto Manufacturer: BAIC Group is the fifth-largest auto manufacturer in China with 11.4% of the market by sales volume in 2014. Beijing Hyundai Motor Co., Ltd. (Beijing Hyundai), which accounted for about 47% of the group's total auto sales volume in 2014, was the fifth-largest passenger vehicle manufacturer in China (or the fourth if mini-buses are excluded) with a market share of 5.7% in 2014, while Beijing Benz Automotive Co., Ltd. (Beijing Benz) ranked second and third in the JV brand premium SUV and sedan segments in 2014, respectively.

Well-balanced Product Portfolio: Passenger vehicles and commercial vehicles accounted for about 77% and 23% of BAIC Group's sales volume in 2014, respectively. The group's passenger vehicle portfolio is diversified, with a wide variety of large sedans, mid-sized sedans, compact sedans, small sedans, SUVs, and MPVs to meet consumer demand from both the mainstream/mass market segment and the premium segment. The group is also positioning its product pipeline to focus on SUVs, the fastest-growing passenger vehicle segment, through its two JVs as well as its proprietary brand.

JV Model Lowers Business 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 JVs manufacture the foreign partners' existing vehicle models and use their well-established brand names. The JVs incur limited research and development costs, bear relatively low risk in product development and branding, and comply with more stringent overseas safety and environmental standards.

Execution Risk in Proprietary Brand: Beijing Motor, which manufactures BAIC Group's proprietary brand of passenger vehicles, has a small operating scale and has yet to generate a gross profit. While Beijing Motor's operating scale and profitability will improve with new model launches from 2015, uncertainties remain over management's execution of the strategy to develop its proprietary brand.

Moderate Financial Leverage: Fitch assesses BAIC Group's financial profile based on a proportionate consolidation of the two JVs. As a result, BAIC Group's financial profile is underpinned by the JVs' solid profitability and consistent net cash positions, but these are partially offset by the weaker financial profile of the group holding company and non-listed operations. The group's proportionately consolidated EBIT margin was about 4.7% and FFO adjusted net leverage was about 1.7x at end-2014.

Cash Trapped at JV-level: While Beijing Hyundai has maintained a high dividend payout ratio, Beijing Benz has not paid any dividends in the last three years due to capex requirements for capacity expansion. Fitch expects Beijing Benz to start paying dividends once capex levels off from 2015. The group is planning to implement a cash pooling scheme, which will increase the amount of JV-level cash being centralised and utilised within the group.


Fitch's key assumptions within our rating case for the issuer include:

- Beijing Hyundai's revenue to increase by high-single-digit CAGR in 2015-2017
- Beijing Benz's revenue to rise by CAGR of about 30% in 2015-2017
- Beijing Motor posts a gross profit in 2015
- 80% dividend payout ratio for Beijing Hyundai
- 40% dividend payout ratio for Beijing Benz from 2016


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

- Significant improvement in the group's market position, including a sustained increase in the market shares of its joint ventures, Beijing Benz and Beijing Hyundai, as well as successful expansion and profit improvement of its proprietary brand
- Sustained net cash position under proportionate consolidation of Beijing Benz and Beijing Hyundai

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

- Sustained deterioration of the group's business profile, including material adverse regulatory developments, or sustained gross losses for the proprietary brand
- FFO adjusted net leverage at above 2.0x on a sustained basis, under proportionate consolidation of Beijing Benz and Beijing Hyundai
- Sustained reliance on dividends from a single JV
- Weakening of linkages with Beijing Municipal Government