Credit Analysis of Vehicle Manufacturers

Home , Beijing Benz, BMW Brilliance, Brilliance Auto Group, BYD Company, FAW Group, Geely

December 3, 2020

ANALYSTS Key Takeaways Li Dan ― Due to their leading competitive position, lower financial risk and strong government Beijing +86-10 6516 6042 support, we view the indicative issuer credit quality of FAW, SAIC, CSGC, DMG and GAG as dan.li relatively high. @ spgchinaratings.cn ― We find that passenger vehicle manufacturers with higher market share and larger scale Gao Yuze generally have leading competitive positions. Firms mainly engaged in rolling out Beijing commercial vehicles generally have smaller market scale, and therefore tend to have +86-10 6516 6027 weaker competitive positions. yuze.gao @ spgchinaratings.cn ― Financial risk varies among vehicle manufacturers. Some large state-owned enterprises (SOEs) have abundant cash flow, while the financial risk of bus manufacturers is Zhang Juanzi Beijing relatively high. As the industry continues to develop, capital expenditure may continue to +86-10 6516 6030 increase and overall financial risk across the industry would grow. juanzi.zhang @ spgchinaratings.cn ― The auto sector may have a relatively strong influence on the macro-economy, consumption and tax revenue and so on. For this reason, we generally expect the leading central or regional SOEs in our sample to obtain a higher level of government support.

Overview

By applying our corporate ratings methodology to public information, we have carried out a desktop analysis of 18 auto manufacturers, arriving at an initial overview of the relative ranking of each company’s credit quality, or their “indicative issuer credit quality” (please see the chart below). In our view, these 18 firms are representative of the vehicle manufacturing sector in China, with our sample covering more than 90% of total market share in the industry. Please refer to the appendix for the names of the firms in the sample. We believe that the overall indicative issuer credit quality of China's automobile manufacturers is relatively good. Leading firms in the sector have strong debt payment capability, and some large SOEs are of relatively high indicative importance to their governments.

S&P Global (China) Ratings www.spgchinaratings.cn December 3, 2020 Credit Analysis of Vehicle Manufacturers December 3, 2020

Chart 1 Ranking of Sampled Companies' Indicative Issuer Credit Quality

FAW

SAIC

CSGC

DMG

GAG

BAG

Chang'an

Geely Holding

Yutong

BYD

King Long Motor

Great Wall

Jianghuai

Qingling Motors

Zhongtong

Sokon

NIO

Brilliance Auto

Stronger← Indicative Issuer Credit Quality →Weaker Note: The chart only displays a relative ranking of indicative issuer credit quality. Source: S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

This report on companies’ indicative issuer credit quality uses S&P Global (China) Ratings’ corporate methodology. When we analyze the credit quality of non-financials, we usually begin with analysis of the entity’s business risk profile and financial risk profile before looking at other factors to arrive at its Stand-alone Credit Profile (SACP). We then analyze the external support that companies may obtain, including group or government support, to arrive at the Issuer Credit Rating (ICR).

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Chart 2

About This Article

S&P Ratings (China) Co., Ltd. (S&P China) has conducted a desktop analysis of a selection of entities, which we have chosen based on their asset sizes, representativeness of most regions and availability of public information. The analysis contained herein has been performed using S&P China Methodologies. S&P China Methodologies and analytical approaches are intended specifically for use in China only, and are distinct from those used by S&P Global Ratings. An S&P China opinion must not be equated with or represented as an opinion by S&P Global Ratings, or relied upon as an S&P Global Ratings opinion.

This desktop analysis has been conducted using publicly available information only, and is based on S&P China’s methodologies for corporates. The analysis involves a desktop application of our methodologies to public information to arrive at a potential view of credit quality across sectors. It is important to note that the opinions expressed in this report are based on public information and are not based on any interactive rating exercise with any particular entity. The opinions expressed herein are not and should not be represented as a credit rating, and should not be taken as an indication of a final credit rating on any particular entity, but are initial insights of potential credit quality based on the analysis conducted. This desktop analysis does not involve any surveillance. The opinions expressed herein are not and should not be viewed as recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

We have conducted this desktop analysis on individual corporates and present the results contained herein at an aggregate group level. The different sections of this research show the statistics and performance of different groups of entities and the market more broadly against the metrics we generally consider most relevant under our methodologies.

Given the desktop nature of this analysis, and that we have not conducted an interactive review with any particular entity, we may have made certain assumptions in lieu of confirmed information and where relevant we may also have attempted to consider any possibility of parent, group, government or other forms of potential support, to inform our view of potential

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credit quality. S&P China is not responsible for any losses caused by reliance on the content of this desktop analysis.

Business Risk Profile

In general, we assess a company’s business risk profile by combining our analysis of its industry risk and competitive position.

Industry Risk Ranking We believe that the industry risk ranking of the vehicle manufacturing industry is at an average level (3), putting it in the middle of our six-tier ranking. In general, we gauge an industry’s risk by considering competition within the industry and the sector’s cyclicality. Our assessment is based on the generally stable competition patterns and moderate cyclicality of the auto manufacturing sector. In our view, the competition trends in China’s auto manufacturing industry are generally stable. As a capital and tech intensive industry, the automobile sector has high barriers to entry and overall concentration of the industry is relatively high. In the last five years, the sales of the top ten automobile groups accounted for more than 80% of the industry total. The top three players saw sales in 2019 account for 49.0% of the industry total. The last three decades have seen the emergence of foreign-funded players in China’s auto market, the prevalence of joint ventures and the gradual growth of local brands. Competition in the industry is relatively stable and generally defined by the "big six and eight small" players. The "big six" are SAIC, FAW, DMG, CSGC, BAG and GAG, while the "eight small" players refers to Brilliance Auto, Great Wall, Jianghuai, Chery, Geely Holding, BYD, CNHTC and Shaanxi Heavy Duty.

Chart 3

Market Share of Vehicle Manufacturers, 2019

Other, 11.0%

CR3, 49.0%

CR4-10, 40.0%

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In our view, cyclicality in this sector is average. The macro-economic environment and consumers’ income both have a significant influence on auto consumption. China has seen rapid growth in car ownership in recent years, with 173 vehicles per 1,000 people in 2019, according to the World Bank. This trend has emerged amid a sharp increase in per capita disposable income, improved transportation infrastructure and the resulting increase in demand for transport and travel. Today, China is the world’s largest producer of vehicles, as well as the world’s largest auto consumer market. However, since 2018, year-on-year auto sales have declined. This trend comes amid slowing economic growth, more cars being bought a few years ago due to the consumer- friendly policies and other factors such as decreasing discretionary expenditures due to the growing burden of mortgage repayments. China's economy is expected to maintain a certain level of growth in the coming years, and consumers’ disposable income will continue to increase, meaning there is still ample space for car ownership levels to expand. At the same time, innovation in areas such as new energy vehicles (NEVs), Internet of Things and vehicle connectivity can also bring new opportunities, further reinforcing the foundations for the development of the whole industry.

Chart 4 Automobile Sales and Sales Growth in Recent Years

3500 25%

3000 20% 15% 2500 10% 2000 5% 1500 0%

10,000 Vehicles 1000 -5% 500 -10% 0 -15% 2014 2015 2016 2017 2018 2019 2020.1-9

Truck Sales Volume Bus Sales Volume Passenger Vehicles Sales Volume YoY Change of Passenger Vehicle Sales (Right Axis) YoY Change of Bus Sales (Right Axis) YoY Change of Truck Sales (Right Axis) Source: Wind, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Passenger vehicles dominate sales in the industry, and development of this segment can have a significant impact on the wider automobile market. Sedans have long remained the most widely sold type of passenger vehicle, but SUVs have seen strong growth in recent years, after finding a niche among Chinese consumers. In recent years, the SUV market has developed rapidly. 43.6% of all passenger vehicles sold in 2019 were SUVs, compared to 20.7% in 2014. In terms of branding, Chinese automakers’ proprietary brands capture a higher proportion of sales in the passenger vehicle market, but they are mostly positioned at the lower end of the market with weaker growth prospects. German and Japanese brands continue to occupy market share in various segments, due to their well-known brands, higher product quality and stable product upgrades. South Korean and U.S. brands have seen their sales affected by strained bilateral relations and trade frictions, and they are generally slower at launching new products on the market.

Analysis of Competitive Position We generally consider the competitive position of a company from four aspects: competitive advantage, scale, scope and diversity, operating efficiency and profitability.

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Since joining the WTO in 2001, China’s auto market has developed rapidly. Vehicle manufacturers have continuously expanded their technical know-how through joint ventures with foreign brands and other means, constantly expanding their scale, striving for market share and maintaining their competitive position. We view competitive advantage, scale, scope and diversity as key to the operations of auto manufacturers.

Competitive Advantage In our view, the competitive advantage of firms in our sample is largely dependent on market share and the methods adopted by the companies to drive sales of all their vehicles and core products. Large SOEs like SAIC, FAW and DMG have obvious competitive advantages due to their joint venture (JV) and commercial vehicle brands. With strong market recognition and competitiveness of these brands, their combined total market share is about 50%. Geely Holding and GAG have competitive brands in the passenger vehicle market, and this increases their share of the overall automobile market. For commercial vehicle manufacturers primarily engaged in bus production or NEV manufacturers, the limited scale of these markets drags on their market share, weakening their competitive advantage.

Chart 5 Market Share of Vehicle Manufacturers, 2019 30.00%

25.00% 24.2%

20.00%

15.00% 13.4% 11.4% 10.00% 8.0% 8.0% 8.0% 7.7% 7.4%

5.00% 4.1% 2.4% 1.8% 1.6% 1.3% 0.2% 0.2% 0.2%0.1% 0.1% 0.00%

In our view, high brand awareness, accurate brand positioning, better product quality and value preservation are the key drivers for automakers gaining high market shares in the passenger vehicle sector. German and Japanese JV brands are well-recognized in China's passenger vehicle market, with good brand recognition and value preservation, and strong competitive advantage. China’s top five automakers (in terms of market share) are all JV brands or well-recognized global luxury car brands with high brand awareness and strong market shares. For example, SAIC owns SAIC Volkswagen (a German JV) and SAIC GM (a U.S. JV). FAW owns FAW Volkswagen and FAW Audi (German JVs) and FAW Toyota (Japanese JV); DMG owns DMG Nissan and DMG Honda (Japanese JVs); Geely Holding Group owns Volvo (a Swedish brand with strong sales overseas) and GAG owns GAG Honda and GAG Toyota (Japanese JVs). However, manufacturers that mainly rely on their own proprietary brands have relatively weaker competitive advantages due to their lower brand recognition and value preservation. In addition, although Brilliance Auto has a high market share in the domestic luxury car market through its JV with Germany’s BMW, its market share in the overall passenger vehicle segment is still low due to the small scale of the luxury car sector. Compared to top market players, Brilliance Auto has relatively weaker competitive advantage.

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Chart 6 Passenger Vehicle Market Share, 2019 30.00% 26.3% 25.00%

20.00%

14.8% 15.00% 11.5% 9.6% 9.6% 10.00% 7.8% 6.6%

5.00% 4.2% 3.8% 2.8% 2.1% 0.7% 0.1% 0.00%

For commercial vehicles, the factors at play driving market demand are different. Trucks rely on demand from the logistics and infrastructure sectors, as opposed to buses, which rely on consumers and government procurement for demand. With the development of the logistics and infrastructure industries in 2020, trucks have remained at the core of the commercial vehicle market, and have maintained a certain scale, with SAIC, BAG, DMG and CSGC maintaining their competitive advantages in this market. However, the overall scale of the bus market remains small and has been affected by COVID-19. For firms in our sample that are mainly engaged in bus manufacturing, their competitive advantage is relatively weak.

Chart 7 Commercial Vehicle Market Share, 2019 35.00%

30.00% 28.8%

25.00%

20.00%

15.00% 13.8%13.0% 10.8% 10.00% 8.8% 6.4% 6.0% 5.00% 3.9% 3.8% 1.4% 1.3% 1.0% 0.4% 0.3% 0.2% 0.1% 0.00%

We view that targeting the luxury car market can help automakers maintain and expand their market share. With the development of China’s consumer market towards higher quality high- end products, the luxury car market has shown strong growth and resilience, and its market

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share has been rising. China’s economic recovery from COVID-19 saw the luxury car market pick up at a much faster pace than other auto sectors. From January to September 2020, retail sales in the luxury car market increased by 10.9% year-over-year. Within our sample, FAW, BAG, SAIC and Geely Holding rank top for their shares of the luxury car market, which helps to maintain their competitive advantage. With the contribution of the BMW Brilliance JV, Brilliance Auto's performance in the luxury car market has been satisfactory. However, the easing of equity cap restrictions on JVs may see its control over BMW Brilliance weaken further, with a knock-on effect on its competitive advantage.

Chart 8 Luxury Vehicles Market Share, 2019 30.00%

24.5% 24.6% 25.00%

19.0% 20.00% 18.3%

Company Name Brand 15.00% FAW FAW-AUDI BAG Beijing-Benz

Brilliance Brilliance-BMW 10.00% SAIC SAIC-CADILLAC 7.1% GEELY HOLDING VOLVO 5.2% DMG DMG-INFINITE 5.00% 1.2% 0.00%

In the long term, we expect manufacturers that focus on R&D and developing their own technology to be in a good position for improving their market position and competitive advantage. In addition to consumer demand for safety and comfort, the auto industry is set to further explore intelligent technology, data sharing, electrification and Internet of Things technology. This will put further emphasis on the R&D and technical ability of vehicle manufacturers. We found that large passenger automakers, such as Geely Group, SAIC and FAW, have higher R&D investment. Companies focusing on areas like NEVs and intelligent vehicles, such as NIO, GAG and BYD, have high R&D/sales ratios, which can help them maintain their competitive advantage in the long run. The R&D/sales ratio of Sokon is relatively high. In 2018, the company started to produce NEVs in Chongqing, but the scale of its R&D spending was small, and its integration with the firm’s core technology was limited, weakening its long-term competitive advantage.

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Chart 9 R&D of Sampled Companies, 2017-2019 200 10% 180 160 8% 140 120 6% 100 80 4% 60 40 2% 20 0 0%

Total R&D (100 million RMB) R&D/Revenue（right scale) Note: R&D/Revenue for NIO is the average for 2018 and 2019. Source: Annual reports, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Scale, Scope and Diversity When considering the scale, scope and diversity of automakers, we usually focus on the scale of revenue and assets, the scope and sales volume of core products, brand positioning and product diversity. We believe that the vehicle manufacturing industry is asset intensive, and firms with larger asset and revenue scales usually have higher market shares, which helps them exploit their economies of scale. More than half of the firms in our sample have three-year average assets of more than 100 billion RMB, and eight enterprises have three-year average revenue of more than 100 billion RMB. The asset and revenue scales of large SOEs and passenger vehicle manufacturers are generally higher than those of commercial vehicle firms. SAIC, FAW, BAG, CSGC and Geely Holding have strong scale advantages. Meanwhile, we expect SAIC’s scale advantage to become more evident as its JV with Audi continues to perform well.

Chart 10 Average Total Assets and Revenues of Sampled Companies, 2017-2019 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

In our opinion, offering a wider range of products and having larger sales volume can help a company maintain its revenue scale and cash flow. Due to the differences in downstream demand of passenger and commercial vehicles, a broader product range can cushion against

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fluctuating downstream demand in one segment and help maintain stable revenue and cash flow. In our sample, SAIC, FAW, DMG, CSGC and BAG all have good sales performance in the passenger and commercial vehicle markets, which can provide some guarantee over the stability of their revenue and cash flow.

Chart 11 Breakdown of Car Sales in 2019

700

600

500

400

300

200

100

From our perspective, multiple brands and a wider product mix can help companies become more risk resilient. A growing number of brands have different product cycles, which to some extent can safeguard against declining sales during downturns in the cycle. Having a wide range of products and varied brand positioning can help companies meet the different needs of the market and maintain revenue scale and cash flow to the greatest extent possible. The success of JVs can depend on the state of bilateral ties and market recognition of that brand. Having a wider range of partnerships with brands from different countries can help companies mitigate risk and maintain their competitive positions. We found that SAIC, FAW, DMG and BAG are partnered with a relatively broad range of international brands, with their products and brand positioning covering most aspects, indicating they have strong scale, scope and diversity advantages in terms of products and branding. GAG and NIO mainly target the middle end market with their brands. Compared with other large automakers, their diversity is relatively weak.

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Chart 12 Main Brand Countries and Brand Types of Sampled Automakers South Korean Domestic German brand Japanese brand U.S. brand Commerical brand (Including Others brand (Including JVs) (Including JVs) (Including JVs) Vehicle Brand JVs) BAG ◆◆ ◆ ◆ ◆ Brilliance Auto ◆ ◆ ◆ BYD ◆ ◆ ◆ Chang'an ◆ ◆ ◆ ◆ CSGC ◆ ◆ ◆ ◆ DMG ◆ ◆◆ ◆ ◆ ◆ FAW ◆◆ ◆◆ ◆ ◆ GAG ◆ ◆ ◆ ◆ Geely Holding ◆ ◆◆ Great Wall ◆◆ ◆ Jianghuai ◆ ◆ King Long Motor ◆ NIO ◆ Qingling Motors ◆ SAIC ◆◆ ◆ ◆◆ ◆ Sokon ◆ ◆ Yutong ◆ Zhongtong ◆

◆ Luxury brand ◆ High-middle end brand ◆ Middle-low end brand ◆ Commercial vehicle brand

Note: Based on market prices, the average price of high-end brands is no less than 300,000 RMB, the average price of middle end brands is (300,000 RMB to 150,000 RMB), and the average price of middle-low end brands is less than 150,000 RMB. Source: Public information, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Operating Efficiency When considering the operating efficiency of vehicle manufacturers, we generally consider the premium pricing of their core products, cost control ability and turnover rate. We find that passenger vehicle companies present in the luxury car market and leading bus companies can set higher premium pricing and have higher gross margins. The high pricing of luxury vehicles is the main reason for the relatively high gross margins of Brilliance Auto, BAG, Geely Holding and FAW. However, if Brilliance Auto transfers the equity of its JV to BMW, we would expect its gross margin to decline significantly in the future. The gross margins of automakers with middle and low-end brands, especially where domestic middle and low-end brands are the core products, are relatively low. This, in our view, is why Chang’an, SAIC and DMG all have relatively low gross margins (not counting their JV businesses). NIO is still in the initial stages of development and as of the end of 2019 had not made a profit. As a leading bus manufacturer, Yutong has obvious product and cost advantages, and has been able to maintain a relatively high gross margin amid a post-boom decline and rising industry concentration. However, with the decline of new energy subsidies in the bus sector, the gross margin of bus manufacturers is generally on a downward trend.

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Chart 13 Average Gross Margin of Sampled Companies, 2017-2019

30 25 20 15 10 5 0 (5) (10) (15)

Capacity utilization rate is an important indicator for measuring the operating efficiency of vehicle manufacturers. A high capacity utilization rate means that companies can benefit from their economies of scale and reduce unit costs. We looked at 14 firms in our sample with relevant data available, and found that in 2019, the overall capacity utilization rates of Jianghuai, SAIC, Yutong, Great Wall and DMG were all above 80%. Their ability to control costs is relatively strong, partially making up for their lower brand premiums. In recent years, while auto sales have declined, more major automakers have expanded into the NEV sector. However, the NEV market is still limited in scale, which has led to overcapacity for some manufacturers. If a manufacturer continues to have surplus capacity, its operating costs and operational risk may increase. We note that the overall capacity utilization rates of Chang’an, CSGC, Geely Holding, FAW and Brilliance Auto are relatively low, because of sluggish sales among some of their domestic brands.

Chart 14 Capacity Utilization Rate of Sampled Companies, 2019

120

110

100

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Due to differences in downstream demand, the turnover days of accounts receivable are longer for commercial vehicle manufacturers than for passenger vehicle companies. However, as passenger vehicles are traditionally sold through dealerships, inventory pressure on automakers is relatively light and the turnover period for accounts receivable is relatively short. Within our sample, manufacturers generally have similar asset operation capability. For BYD, it should be noted that its battery business means it has relatively long turnover days for accounts receivable and deposits. Automakers are generally in a strong position when negotiating with upstream suppliers, which is why their accounts payable period is relatively long.

Chart 15 Average Turnover Days of Sampled Companies, 2017-2019

400 350 300 250 200 150 100 50 0

Receivable Turnover Days Inventory Turnover Days Payable Turnover Days Note: Data for NIO is the average for 2018 and 2019. Source: Annual reports, S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Profitability Profitability can give a pretty comprehensive indication of a company’s competitive position. Firms can improve their profitability with strong brands, some ability to set premium pricing and effective control over costs. In our evaluation of vehicle manufacturers’ profitability, we mainly consider EBITDA margin and return on capital (ROC). The chart below shows the adjusted EBITDA margin and ROC for each firm in our sample. The EBITDA margin of most automakers is between 5% and 15%. In our opinion, the EBITDA margin reflects the overall premium level of that company's auto brands and the company's own cost control ability. The profit levels of DMG, Yutong, SAIC, GAG and Qingling Motors are relatively good. Although the EBITDA margin of BAG and FAW is average, their ROC is good and overall profitability is modest.

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Chart 16 Average EBITDA Margin of Sampled Companies, 2017- 2019 20

(5)

Chart 17 Average ROC of Sampled Companies, 2017-2019

-10

Financial Risk Profile

Our analysis of an entity’s financial risk profile mainly considers cash flow-based credit metrics. To measure the financial risk profile, we generally look at the company’s adjusted debt/EBITDA ratio and funds from operations (FFO) to adjusted net debt. We have found that clear differences exist between the financial risk profiles of vehicle manufacturers, due to their different product structures, market positions and business management processes. Passenger vehicle manufacturers are generally in a better financial position than commercial vehicle companies. Among the 18 firms in our sample, GAG, SAIC,

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Qingling Motors and FAW have abundant cash reserves, zero net debt and low financial risk. Zhongtong, King Long Motor and Jianghuai focus on production of commercial vehicles. Their business turnover rate is generally slower than passenger vehicle manufacturers, with weaker profitability and higher financial leverage. NIO, as a new player on the market, has high investment levels and weak profitability. Its operating cash flow and EBITDA are both net out flow, and its core financial indicators are negative. Although the financial risk of Brilliance Auto in the past three years has been acceptable, the company's control over its JV brand is weak. In addition, the company faces high pressure from short-term debt maturing this year. The negative impact of the transfer of ownership of the JV's equity on future cash flow has knocked market confidence in the company's ability to meet its debt obligations. Refinancing for the firm is difficult, liquidity is tight and its financial risk has intensified.

Chart 18 2017-2019 Financial Ratios of Auto Enterprises

200% 20 160% 16 120% 12

80% 8 (X) 40% 4 0% - -40% (4) -80% (8)

Average FFO/DEBT Average DEBT/EBITDA(Right Axis)

Note:The net debt of GAG, SAIC, Chang'an Motors FAW and Qingling Motor are all zero. Source: Public information. S&P Global (China) Ratings. Copyright © 2020 by S&P Ratings (China) Co., Ltd. All rights reserved.

Vehicle manufacturers need significant capital expenditure to maintain or expand their market share. In recent years, policies and market trends have pushed many automakers to make significant investments in NEVs and intelligent vehicle technology. In our sample, Geely Holding, SAIC, FAW, BAG, BYD and CSGC have all had average annual capital expenditure of more than 15 billion RMB in the past three years. Geely Holding’s annual capital expenditure exceeded 40 billion RMB, amid a push to break new ground in NEVs and other new sectors through continuous expansion of production capacity. In contrast, most firms that rank towards the lower end in terms of capital expenditure are commercial vehicle manufacturers that primarily produce buses. This is closely related to the limitations of the bus market.

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Chart 19 CAPEX of Sampled Companies, 2017-2019 (RMB, 100 million) 450 400 350 300 250 200 150 100 50 0

2017 2018 2019 3-year Average

We compare capital expenditure to EBITDA to measure the degree of capital expenditure for our sample. Half of the 18 firms have a capital expenditure/EBITDA ratio of over 70%. The overall level of capital expenditure in the industry is high, and firms’ financial leverage is likely to rise.

Chart 20 CAPEX/EBITDA of Sampled Companies, 2017-2019

500%

400%

300%

200%

100%

-100%

Overall, the financial risks of automakers vary, with obvious polarization across the industry. In addition, the financial risk of passenger vehicle manufacturers is generally lower than that of commercial vehicle companies. However, certain passenger vehicle firms that have invested significant amounts into NEVs may face additional financial risk.

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Indicative Distribution of Indicative Business and Financial Risk Profiles

Based on the above analysis, we have arrived at the indicative business and financial risk profiles of the 18 companies in our sample, the distribution of which is shown in the chart below. In general, we combine the business and financial risk profiles of a company to form an anchor for our assessment of credit quality. From this starting point, we usually further consider the degree of diversification, capital structure, financial policy, management and governance, liquidity and other holistic factors to arrive at our evaluation of the company’s SACP.

Chart 21 Distribution of Sampled Auto Manufacturers' Indicative BRP & FRP

Brilliance Auto

Jianghuai NIO

Zhongtong King Long Motor BAG CSGC Geely Holding BYD Sokon Yutong ← Indicative FRP → Higher risk DMG Great Wall SAIC Chang'an FAW GAG Qingling Motors Lower risk Lower Stronger← Indicative BRP →Weaker

Government and Group Support

After arriving at the companies’ indicative SACP, we also consider the potential influence of government or group support on credit quality. SOEs account for a large proportion of China’s automakers. We generally view large vehicle manufacturers as being of relatively high importance to the government, as leading firms in the sector often play an important role in driving the development of related industries and make valuable contributions in terms of tax and employment. However, for automakers with weak competitive positions and higher financial risk, they have a limited role in the abovementioned aspects, which makes them of relatively lower importance to authorities and limits potential government support.

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Appendix

List of Sampled Companies

No. Entity Name Abbreviated Name Entity Type

Anhui Jianghuai Automobile Group 1 Jianghuai Regional SOE Corp.,Ltd.

2 Beijing Automotive Group Co.,Ltd BAG Regional SOE

3 BYD Company Limited BYD POE

Chongqing Sokon Industry Group 4 Sokon POE Stock Co.,Ltd.

Chongqing Changan Automobile 5 Chang'an Central SOE Subsidiary Company Limited

6 Great Wall Motor Company Limited Great Wall POE

Dongfeng Motor Group Company 7 DMG Central SOE Limited

8 Guangzhou Automobile Group Co., Ltd GAG Regional SOE

9 Brilliance Auto Group Holding Co.,Ltd Brilliance Auto Regional SOE

10 Qingling Motors Co. Limited Qingling Motor Regional SOE

11 SAIC Motor Corporation Limited SAIC Regional SOE

12 NIO Inc. NIO POE

Xiamen King Long Motor Group 13 King Long Motor Regional SOE Co.,Ltd.

14 Zhejiang Geely Holding Group Co.,Ltd Geely Holding POE

15 Zhengzhou Yutong Group Co.,Ltd Yutong POE

16 China South Industries Group Co.,Ltd. CSGC Central SOE

17 China Faw Group Corporation FAW Central SOE

18 Zhongtong Bus Holding Co.,Ltd. Zhongtong Regional SOE Note: Companies listed in alphabetical order, based on pinyin name.

This report does not constitute a rating action.

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