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Moody's Affirms Beijing Automotive Group's Baa2 Ratings; Revises Outlook to Negative

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Moody's Affirms Beijing Automotive Group's Baa2 Ratings; Revises Outlook to Negative Rating Action: Moody's affirms Beijing Automotive Group's Baa2 ratings; revises outlook to negative 29 Jul 2019 Hong Kong, July 29, 2019 -- Moody's Investors Service has affirmed the Baa2 issuer rating of Beijing Automotive Group Co., Ltd. (BAIC Group), and the Baa2 senior unsecured rating on the bonds issued by BAIC Inalfa HK Investment Co., Limited and guaranteed by BAIC Group. At the same time, Moody's has changed the outlook on the ratings above to negative from stable. RATINGS RATIONALE "The ratings affirmation reflects BAIC Group's high importance to China's automotive industry in terms of scale, contribution to the development of new energy vehicles and leading position among Beijing Municipal Government's state-owned enterprises, in terms of financial scale and fiscal contribution," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer. As such, BAIC Group's Baa2 ratings incorporate a three-notch uplift, based on Moody's expectation that the company will receive a high level of extraordinary support from the Beijing Municipal Government, and ultimately the Government of China (A1 stable) through the company's parent, Beijing State-owned Capital Operation and Management Center (BSCOMC, A1 stable), if needed. "BAIC Group's proposed investment in Daimler will further solidify the two companies' relationship," adds Ho, who is also Moody's Lead Analyst for BAIC Group. "As BAIC Group's key joint venture partner, Daimler is important for BAIC Group's operation and business profile in terms of premium product offerings and profitability." On 23 July 2019, BAIC Group announced that it acquired a 5% stake in the share capital of Daimler, in the form of a 2.48 % direct shareholding and a right to acquire additional voting rights equaling 2.52% of Daimler's share capital. Moody's expects BAIC Group will fund the consideration from internal resources, borrowings and through other funding channels. Daimler is one of the world's leading premium passenger car manufacturers through its valuable Mercedes- Benz Cars premium brand, as well as a global leader in the medium and heavy trucks market, with solid market shares in Europe, Brazil, NAFTA and Japan. The two companies have cooperated in the production, research and development, as well as sale of passenger vehicles and commercial vehicles in China since the early 2000's. Daimler also has equity stakes in BAIC Group subsidiaries, including BAIC Motor Corporation Limited and BAIC BluePark New Energy Technology Co. Ltd. "At the same time, the negative ratings outlook reflects Moody's view that BAIC Group will need more time to reduce its leverage to a level appropriate for its standalone credit strength — due to the to-be-completed investment in Daimler — and the greater uncertainty over the company's profit growth, because of weak auto demand in China," adds Ho. Moody's estimates that BAIC Group's leverage — as measured by debt/EBITDA — will reach about 6.0x over the next 12 to 18 months, upon the completion of the investment in Daimler, assuming that the transaction is partly debt-funded. This level of leverage will diverge from Moody's previous expectation that leverage will register about 5.0x over the next 12 to 18 months. Such a trend, if it materializes, would be weak for the company's standalone credit strength. Moody's assessment of BAIC Group's financial metrics is based on its financials after adjusting for the pro rata consolidation of its two key joint venture companies, Beijing Benz Automotive Co., Ltd. and Beijing Hyundai Motor Co., Ltd. BAIC Group's standalone credit strength is underpinned by its (1) strong competitive position in China's auto market, which mirrors the strength of its two key joint ventures, Beijing Benz Automotive Co., Ltd. and Beijing Hyundai Motor Co., Ltd.; and (2) diversified product lineup. At the same time, its standalone credit strength is constrained by its geographic concentration in China, as well as its low profitability and high debt leverage. BAIC Group's access to liquidity as a holding company is manageable. Moody's believes the group can meet its refinancing requirements, given its ownership by the Beijing Municipal Government, good banking relationships and proven access to the local and offshore capital markets. As an automaker, BAIC Group is exposed to environmental, social and governance risk. Meeting regional emission requirements, particularly those relating to CO2, is one of the most pressing and challenging objectives facing the auto industry over the medium to long term. BAIC Group has invested in research and development to develop new energy vehicles (NEVs), including battery electric vehicles, which will help the company manage environmental risk. During 2018, the company's own brand NEV maker was one of the leading NEV passenger vehicle maker in China in terms of unit sales. BAIC Group maintains transparency through financial reporting disclosures, provided as a result of its issuance of onshore bonds. The company is under the management oversight of the Beijing State-owned Assets Supervision and Administration Commission via BAIC Group's parent, BSCOMC. The ratings outlook could return to stable if BAIC Group improves its profitability and financial leverage over the next 12-18 months to levels consistent with its standalone credit strength. Financial metrics that Moody's would consider for a return to a stable ratings outlook include debt/EBITDA trending below 6.0x over the next 12-18 months. Downward ratings pressure could emerge, if BAIC Group: (1) exhibits weakening sales or falling profitability; (2) expands its capacity rapidly or undertakes debt-funded acquisitions, such that debt/EBITDA fails to trend down to 6.0x or below over the next 12-18 months; or (3) faces substantial changes in its joint venture relationships, in particular those with Hyundai Motor Company (Baa1 negative) and Daimler. Any indications of weaker parental support for BAIC Group could also be negative for the ratings. The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. Beijing Automotive Group Co., Ltd. (BAIC Group) is one of the top five automakers in China by unit sales. It recorded sales totaling 2.4 million units in 2018. The company has a comprehensive product line-up, spanning passenger and commercial vehicles. Its key joint ventures for passenger vehicles include Beijing Benz Automotive Co., Ltd. and Beijing Hyundai Motor Co., Ltd. BAIC Group is 100% owned by the Beijing State-owned Capital Operation and Management Center. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non- Participating Rated Entities. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Gerwin Ho VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd.
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