OREANDA-NEWS. Fitch has affirmed the expected rating of China-based eHi Car Services Limited's (eHi) proposed US dollar bond issue at 'BB-(EXP)'. Fitch affirmed eHi's Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BB-' on 24 November, following its 3Q15 results announcement. The Outlook on the IDR is Stable.

The final rating on the proposed US dollar bond issue is contingent upon the receipt of final documents conforming to information already received.

Adequate Funding for Fast Expansion: Fitch expects eHi to expand its fleet size to 38,000 vehicles at end-2015 from 19,746 at end-2014 after having raised USD304m from an IPO in November 2014 and other sources. The near-doubling of its fleet in 2015 follows a 71% increase in 2014. This rapid increase in business scale drove revenue 50% higher to CNY851m in 2014 and revenue is likely to reach CNY1.5bn in 2015.

Improving Operating Leverage: eHi is set to benefit from wider margins following the significant increase in scale. The improvement in operational efficiency is mainly due to the combined effect of a larger fleet size per service location and decreasing staff numbers per vehicle. EBITDA margin improved to 41% in 3Q15 from 33% in 2014, and Fitch expects EBITDA margin (excluding gains/losses on car disposals) to increase to above 40% in 2015. The company's larger operating scale will help to drive EBITDA growth of over 40% in each of the next two years, and help to keep FFO net leverage below 3.0x (2014: 1.9x).

Predictable Contractual Service Income: eHi has a well-established reputation in providing car services (including short-term and long-term) to corporate customers and also provides long-term self-drive car rentals; these two segments together accounted for more than 30% of net revenue in 2014. It has more than 32,000 corporate long-term clients, some of which are large multinational companies. Fitch believes eHi's corporate business will continue to generate CNY300m-600m in revenue in 2015-2016, which will provide a cushion to the company in case of distress.

Competitive Pressure: eHi has a smaller fleet size than industry leader, CAR Inc. (CAR, BB+/Stable), which had a fleet size of 93,000 as of September 2015. This puts pressure on eHi to expand to narrow the market-share gap with CAR, which continues to expand aggressively. Competition for market share will put more pressure on eHi's financial profile than on its bigger competitor. eHi generated EBITDA of CNY270m versus CAR's CNY1.60bn in 2014

Unproven Car Disposal Track Record: eHi has not needed to dispose of a large number of vehicles because the fleet is still very young. eHi is currently relying on auction companies to dispose of its vehicles, but it has explored other channels, including working with third-party online platforms and establishing a repurchase programme with auto manufacturers. eHi has yet to prove it is able to dispose of a large number of vehicles and create a sustainable fleet renewal cycle. Considering the immature used-car market in China, car disposal will be one of the main challenges facing eHi in the future.

Regulation Risk: The Chinese car rental and car service industry is mainly regulated by local government authorities without a national governing law. The regulations often vary by geography and are subject to changes and practical deviations. Any unexpected change in regulations could adversely impact eHi's operations. Although these risks are not imminent, the industry is at an early stage of development in China and there are likely to be regulatory changes before the industry matures and stabilises.

Fitch's key assumptions within our rating case for the issuer include:
- Total fleet size will almost double to 38,000 in 2015. Total fleet size to increase by CAGR of 33% over 2015-2019
- Net revenue will increase more than 75% in 2015 and rise by a CAGR of more than 30% in 2015-2019.
- Fleet depreciation schedule: 15% of gross fleet value.
- Existing vehicles purchased before June 2014 will be disposed in 3.5 years; new vehicles purchased after June 2014 will be disposed in 2.75 years.
- Capex/car rental vehicle is CNY100,000 and capex/car service vehicle is CNY225,000.
- EBITDA margin will increase to more than 40% in 2015 and reach 53% in 2019.


Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustained above 3x
- EBITDA margin (excluding gains/losses from car disposals) sustained below 40% (9M15: 39%)
- EBIT margin (excluding gains/losses from car disposals) sustained below 15% (9M15: 5.3%)
- Significant losses from car disposal or evidence of difficulty in establishing a track record of used-car disposal at reasonable terms
- Evidence of greater government, 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 action include:
- No positive rating pressure in the next 12-18 months until it establishes a longer track record of used-car disposal and sustains a fleet renewal cycle
- A more mature regulatory environment in the car rental business