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'A-' Ratings Affirmed Beijing Automotive Group Co. Ltd. Outlook Revised To Negative On Weakening Sales; 'A-' Ratings Affirmed 22-Aug-2017 03:26 EDT View Analyst Contact Information We expect BAG may see a material decline in annual groupwide sales vol ume in 2017 as a result of increasing market competition, unsatisfact ory execution, and reduced product appeal. We expect BAG's reliance on Benz to increase further, given an expect ed full-year net loss at BAG's proprietary brand and reduction in Hyu ndai dividend. We are revising our outlook on BAG to negative from stable. At the sam e time, we are affirming our 'A-' long-term corporate credit rating o n the Chinese automaker. The negative outlook reflects our expectation of sustained intense co mpetition, leading to difficulty in material near-term improvement of its proprietary brand and performance of the Hyundai JV. HONG KONG (S&P Global Ratings) Aug. 22, 2017--S&P Global Ratings today sai d it has revised its outlook on Beijing Automotive Group Co. Ltd. (BAG) to negative from stable. At the same time, we affirmed our 'A-' long-term cor porate credit rating as well as 'A-' long-term issue rating on the Beijing -based Chinese automaker. Our outlook revision reflects our view of BAG's somewhat weakened competit ive advantage, especially in its proprietary brands and joint venture (JV) business with Korea's Hyundai Motor Co. BAG's proprietary Beijing Brand (w hich includes the Senova, BJ, and Wevan series) recorded sales of 105,200 in the first half of 2017, an over 40% year-on-year decline, while its JV w ith Hyundai recorded sales of Hyundai-branded autos of 301,277 in the 2017 first half, also a decline of over 40% year on year. This is against an ind ustrywide backdrop of 2% sales growth in passenger vehicles, according to the China Association of Automobile Manufacturers. We expect both brands t o record material year-on-year volume decline for the full year 2017, lead ing BAG to potentially register a material decline in annual groupwide sal es volume. In our view, BAG's sales decline is the result of increased competition in the Chinese passenger vehicle market, especially in the entry to mid end o f the mass market, which are key markets for Beijing Brand and Hyundai. Sim ilar to BAG, other leading Chinese automakers also have partnerships with leading global original equipment manufacturers (OEMs), which enables them to leverage their partners' expertise and launch high quality, high techno logy models under their own brands. Meanwhile, to remain competitive, majo r global automakers continue to develop price-competitive models tailored to local preferences. As a result, Chinese consumers have become increasin gly selective and unpopular models see rapid volume declines soon after la unch. BAG has suffered from some weakening in its mass market brand appeal over t he past six to 12 months. Although BAG's self-owned Beijing Brand leverage s the Saab platforms it acquired in 2009, the brand has more limited ongoin g technology assistance from leading global OEMs, compared with some of BA G's competitors. The company's execution, especially in sustaining R&D for technology and quality improvement, has also lagged that of competitors ov er the last one to two years, in our view. While recent geopolitical tensio ns have weighed somewhat on the Hyundai brand, its recognition and brand v alue have also been affected by the emergence of Chinese local brands--suc h as SAIC Motor, GAC Motor, and Geely Auto--which have launched several hi gh quality, high technology, and competitively priced models. In our view, Beijing Brand and Beijing Hyundai are likely to see a material volume decl ine in 2017 that may extend into 2018 (compared with 2016 volume), absent m ajor technology breakthroughs and quality enhancements. We expect BAG's reliance and concentration on its JV with Daimler AG to inc rease materially over the next 12-24 months. While we expect a potential o perating loss at Beijing Brand, and a reduction in dividend from Hyundai, sales of Benz-branded autos under the JV with Daimler will likely remain r obust. This follows a successful new model design as part of Daimler's inc reasing focus on China, which includes the localization of key models tail ored to Chinese preferences. These efforts led to a volume increase of ove r 40% in the first half of 2017, and we expect this momentum to continue. A s such, although we expect BAG's EBITDA to remain stable at around 2016 lev els, the contribution from the Benz JV (which we fully consolidate) will l ikely increase to around 80% in 2017/18, compared with 50%-60% in 2016. Th is increases BAG's concentration risk, and leaves the company more vulnera ble to premium market volatilities. The negative outlook on BAG reflects the very competitive Chinese auto mar ket, as well as the carmaker's somewhat weakened competitive advantage, de monstrated by material year on year volume decline for its proprietary bra nds and Beijing Hyundai brands in 2017. In our view, it will be difficult f or BAG to materially improve its competitive advantage over the near term, leading it to potentially register an annual decline in groupwide sales volume. We could lower the rating if BAG's brand recognition or product appeal wea ken such that the group registers over 20% in annual volume decline. We cou ld also lower the rating if BAG's ratio of FFO to debt falls below 20% on a sustained basis, as a result of further industrywide deterioration of prof itability, or if BAG engages in significant debt-funded acquisitions. We could also lower the rating if we believe the likelihood of extraordina ry support from the Beijing government is lower than our current assessmen t. We could revise the outlook to stable if BAG is able to significantly ramp up its sales volume, especially on its proprietary and BJ Hyundai brand, t hrough successful new model launches, such that groupwide annual volume de cline is less than 10%. This also assumes that BAG maintains its current pr ofitability, leading to its FFO to debt remaining above 20%. RELATED CRITERIA General Criteria: Methodology For Linking Long-Term And Short-Term Ra tings , April 7, 2017 General Criteria: Guarantee Criteria, Oct. 21, 2016 Criteria - Corporates - General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015 General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015 Criteria - Corporates - General: Methodology And Assumptions: Liquidi ty Descriptors For Global Corporate Issuers, Dec. 16, 2014 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Criteria - Corporates - Industrials: Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013 General Criteria: Methodology And Assumptions: Assigning Equity Conte nt To Corporate Entity And North American Insurance Holding Company Hybr id Capital Instruments, April 1, 2013 General Criteria: Methodology: Management And Governance Credit Facto rs For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Insurance - General: Hybrid Capital Handbook: September 20 08 Edition, Sept. 15, 2008 Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascrib ed to them in our criteria, and should therefore be read in conjunction wit h such criteria. Please see Ratings Criteria at www.standardandpoors.com f or further information. Complete ratings information is available to subsc ribers of RatingsDirect at www.globalcreditportal.com and at www.spcapital iq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Rating s search box located in the left column. Primary Credit Analyst: Leo L Hu, Hong Kong (852) 2533-3594; [email protected] Secondary Contact: Andy Liu, CFA, Hong Kong (852) 2533-3554; [email protected] .
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