Fitch Affirms BAIC at 'BBB+'; Outlook Stable
19 Sep 2019 04:33 AM ET
Fitch Ratings-Hong Kong-19 September 2019: Fitch Ratings has affirmed Beijing Automotive Group Co Ltd's (BAIC Group) Long-Term Issuer Default Rating (IDR) and foreign-currency senior unsecured rating at 'BBB+'. Fitch has also affirmed the Long-Term IDR and foreign-currency senior unsecured rating of BAIC Group's subsidiary, BAIC Motor Corporation Limited (BAIC Motor) at 'BBB+'. The Outlook on the Long-Term IDRs on both entities is Stable. A full list of rating actions is at the end of this commentary.
BAIC Group's ratings are linked to Fitch's internal assessment of the creditworthiness of Beijing municipality because of the company's strong ties with the local government. BAIC Motor's ratings are equalised with those of its parent, using a top-down approach as per Fitch's Parent and Subsidiary Rating Linkage criteria in light of the strong operational and strategic linkages between the two entities.
KEY RATING DRIVERS
Strong Ties with Beijing: Fitch assesses BAIC Group's status, ownership and control as 'Strong' because it is wholly owned by the Beijing Municipal Government, it is the sole automotive state-owned enterprise (SOE) owned by the municipal government and the government directly appoints the company's management. Fitch also assesses BAIC Group's support record as 'Strong' because it has received direct tangible state support and extensive policy backing.
We also considered the financial implications of a default by BAIC Group as 'Strong' as a default could reduce the access to capital markets for the Beijing government and its government-related entities (GREs). However, as BAIC Group operates in a market-oriented and competitive industry, we have deemed the socio-political implications of a default to be 'Moderate' and this is in line with its GRE peers that operate in competitive environments.
Strong Linkages Within BAIC Group: BAIC Group and its affiliated GREs control over 60% of BAIC Motor. The parent also directly owns 43% of BAIC Motor's outstanding shares. BAIC Motor is strategically and financially vital to BAIC Group. Five members of BAIC Motor's board of directors are appointed by BAIC Group and the company also receives support from its parent.
BAIC Group also has strong operational and strategic ties with another subsidiary Beiqi Foton Motor Co., Ltd. (Foton) and key joint ventures (JV) under BAIC Motor, namely Beijing Benz Automotive Co., Ltd. (Beijing Benz) and Beijing Hyundai Motor Co., Ltd. (Beijing Hyundai). Fitch's analysis is based on proportionate consolidation of Beijing Benz and Beijing Hyundai at BAIC Motor, and the adjusted financials of BAIC Motor and Foton are then fully consolidated with the rest of the BAIC Group.
Positioned for Premium Growth: Fitch believes Beijing Benz is well-positioned to outperform the Chinese passenger-vehicle market in the medium term. The luxury/premium vehicle segment is a growth driver for the Chinese auto industry, supported by rising disposable income, and growing replacement and upgrade demand. Beijing Benz has strong product line-ups and significant brand value among Chinese consumers. BAIC Group's foreign partner Daimler AG (A-/Stable) have invested significantly in technology, including electrification and alternative mobility solutions, as trends shift in the automotive industry. We believe the JV will retain its leading position in China in the medium term.
Diversification Enhances Business Profile: Beijing Hyundai and Beijing Benz are significant contributors to BAIC Group's business. The group also has strong exposure in the commercial-vehicle sector via its proprietary brand. The multiple JVs and product strategies and a well-diversified brand portfolio reduce overall business risk and volatility. However, Beijing Benz's contribution to the group's earnings has increased rapidly since 2017, and significant reduction in contribution by the group's other brands and products could exacerbate concentration in Beijing Benz, which could affect BAIC Group's business profile.
JV Dilution a Risk: Fitch believes BAIC Motor's JV agreements with its foreign automaker partners will remain effective in the medium term. Nevertheless, China aims to open up its auto industry and plans to remove the 50% foreign-ownership cap on local vehicle manufacturing by 2022. Fitch continues to apply a proportionate consolidation approach to BAIC Group's rating, and incorporates BAIC Motor's share of its JVs' cash, debt, EBITDA, funds from operations and other metrics to derive the adjusted financial measures. The JVs support the group's profitability and financial structure and, as such, any dilution of BAIC Motor's ownership in its key JVs could affect its credit profile.
Proprietary Brands Struggle: Fitch expects the weak financial profile of BAIC Group's proprietary brand operation to persist in the medium term. Sales of BAIC Group's proprietary brands declined in 2017 and 2018. Fitch expects BAIC Group's own brands to face intensifying competition from domestic and foreign rivals as China's mass-market auto sales moderate. The company is focusing on developing new-energy vehicles to drive sales growth from 2019, but faces keen competition and lower government subsidies in this auto sub-segment.
Higher Leverage Affects SCP: BAIC Group's Standalone Credit Profile (SCP) is assessed at 'bb-'. Its standalone financial profile is weaker than that of global peers within the 'BB' rating category. The group has had negative free cash flow (FCF) due to large capital expenditure and investments, and the ratio of its total net debt with equity credit to operating EBITDA rose to 4.8x in 2018. The group announced it has taken a 5% equity stake in Daimler AG in 2019. Fitch expects the group's financial leverage to rise further in the near term.
DERIVATION SUMMARY
BAIC Group's rating of 'BBB+' is notched from Fitch's internal assessment of the creditworthiness of the Beijing municipality. This reflects its strong status, ownership and control, strong support track record and expectations, moderate social-political implication of default and strong financial implications of default. The group's assessment under Fitch's Government-Related Entities Rating Criteria is similar to that of other GREs that operate in market-oriented and competitive industries, including Aluminum Corporation of China Limited (A-/Stable), China FAW Group Co., Ltd. (A/Stable) and China Minmetals Corporation (BBB+/Stable).
BAIC Motor's ratings are equalised with those of BAIC Group. This reflects its strong strategic and operation linkages with its parent. The assessment under Fitch's Parent and Subsidiary Rating Linkage criteria is similar to that for its SOE automotive peer, Dongfeng Motor Group Company Limited (A/Stable).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for BAIC Group - Current JV structures and agreements remain in place in the medium term - Proportionately consolidated revenue growth between 2% and 4% over 2019-2022 (2018: -1.5%) - EBITDA margin of 7.3%-7.7% in 2019-2022 (2018: 9.0%) - Proportionately consolidated capex between CNY11 billion and CNY12 billion a year in 2019-2022 (2018: CNY12 billion) - CNY5 billion capital injection from the government in 2020
Fitch's Key Assumptions Within Our Rating Case for BAIC Group - JV structures and agreements remain in place in the medium term - Proportionately consolidated revenue increases by 2%-4% per year in 2019-2022 (2018: 7.5%) - Proportionately consolidated EBITDA margin averages 12% in 2019-2022 (2018: 12.4%) - Proportionately consolidated capex averages CNY7.5 billion per year in 2019-2022 (2018: CNY4.4 billion)
RATING SENSITIVITIES
Beijing Automotive Group Co Ltd and BAIC Motor Corporation Limited
Developments That May, Individually or Collectively, Lead to Positive Rating Action - Improvement in Fitch's internal assessment of the creditworthiness of Beijing municipality, provided the likelihood of support by the Beijing municipal government remains intact - Increasing likelihood of support from the Beijing government
Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deterioration in Fitch's internal assessment of the creditworthiness of Beijing municipality, provided the likelihood of support by the Beijing municipal government remains intact - Decreasing likelihood of support from the Beijing government
LIQUIDITY
Good Access to Markets, Banks: Both BAIC Group and BAIC Motor have robust relationships with domestic banks and easy access to both onshore and offshore capital market financing, which are supported by their status as leading SOEs. At end-2018 BAIC Group had readily available cash and cash equivalents of CNY40 billion on a proportionate consolidation basis and unused banking facilities in excess of CNY57 billion, compared with CNY53 billion of short-term borrowings. BAIC Motor had readily available cash and cash equivalents of CNY20 billion and unused banking facilities of CNY24 billion against short-term debt obligations of CNY12 billion.
FULL LIST OF RATING ACTIONS
Beijing Automotive Group Co Ltd - Long-Term IDR affirmed at 'BBB+'; Outlook Stable
- Senior unsecured rating affirmed at 'BBB+' BAIC Inalfa HK Investment Co., Limited - Rating on EUR500 million 1.9% senior unsecured notes due 2020 affirmed at 'BBB+'
BAIC Motor Corporation Limited - Long-Term IDR affirmed at 'BBB+'; Outlook Stable - Senior unsecured rating affirmed at 'BBB+'
Contact:
Primary Analyst Tyran Kam Director +852 2263 9909 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong
Secondary Analyst Betsy Guo Associate Director +852 2263 9626
Committee Chairperson Yee Man Chin Senior Director +852 2263 9696
Summary of Financial Statement Adjustments - Proportionately consolidated financial statements are used to assess BAIC Group's financial profile, with 51% of Beijing Benz's financial profile and 50% of Beijing Hyundai's consolidated into BAIC Group's adjusted financial statements.
ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
BAIC Group and BAIC Motor both have ESG relevance scores of 4 for group structure due to their multiple JV structures, which have a positive effect on the credit profiles, and is relevant to their ratings in conjunction with other factors.
For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg
Media Relations: Yee Man Ko, Hong Kong, Tel: +852 2263 9953, Email: [email protected] Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: [email protected]
Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 09 Nov 2018) Corporate Rating Criteria (pub. 19 Feb 2019) Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) Government-Related Entities Rating Criteria (pub. 25 Oct 2018) Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) Sector Navigators (pub. 23 Mar 2018)
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