RPT-Fitch rates China's Tianneng Power International 'BB'; outlook stable
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March 19 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has assigned Tianneng Power International Limited (Tianneng), a Chinese manufacturer of lead-acid motive batteries, a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB' with Stable Outlook, and a senior unsecured rating of 'BB'. Fitch has also assigned Tianneng's proposed USD notes an expected rating of 'BB'(EXP). The final ratings are contingent upon receipt of documents conforming to information already received. Key Rating Drivers Small scale constrains ratings: Tianneng's ratings are constrained by its small scale (an estimated EBITDA of around USD185m in 2012) and reliance on a single niche product to generate almost its entire revenue. Leader with established network: Tianneng is a leading Chinese manufacturer of lead-acid motive battery used on electric bikes with a 28% market share in 2012, due to its established nationwide distribution and services network with over 1,300 distributors. Tianneng started to build this network in early 1998, when it started its operations, and it would be difficult for competitors to replicate this in a short period of time. Demand remains strong: Electric bikes, because of their low cost and environment-friendliness, are popular for short-distance transportation in both urban and suburban areas in China. There were approximately 141 million electric bikes in China at end-2012 (compared with 2.2 million at end-2002) and this number is expected to grow by more than 8% annually by 2020, according to industry research. The Stable Outlook is supported by the long-term growth of electric bike usage in China, which drives demand for new and replacement batteries. Dominant and mature technology: Lead-acid motive battery, a mature technology, dominates the Chinese electric bike market due to its low cost, safety stability, and high recyclability. Total battery sales in China in 2012 were 315 million units with two-thirds of that from replacement demand. This dominance allows producers such as Tianneng to pass on price volatility of the main production input, lead, to buyers, leading to stable margins. Tianneng's EBITDA margins have remained well above 10% - the minimum threshold consistent with the current ratings - over the last five years. Regulations support market leaders: To eliminate lead pollution generated during the manufacturing process, the Chinese government has since mid-2011 been phasing out smaller and underdeveloped lead-acid battery production facilities. This accelerates industry consolidation and benefits industry leaders such as Tianneng, whose market share grew to 28% in 2012 from 15.7% in 2010. Low leverage: Tianneng maintained funds from operations (FFO)-adjusted net leverage below 1.0x until end-2011, but Fitch estimates that this number will fluctuate around 1.5x over the next three years, peaking in 2013 at just under 2.0x. This is due to the company's rapid expansion of production and lead recycling capacity to cater to increased sales growth. The company outsourced nearly 20% of its production in 2011 and 2012, because demand exceeded its production capacity. As this results in lower margins Fitch does not believe outsourcing to be a sustainable option. Negative free cash flow: In common with many of its Chinese peers, Tianneng has been consistently generating negative free cash flow due to its sustained large capex programme. Fitch does not expect free cash flow to turn positive before 2016, particularly given that capex might be higher if market demand remains strong. However, Tianneng has the flexibility to decelerate capex if demand falls below expectations. Rating Sensitivities Positive: Future developments that may collectively lead to positive rating action include: - A materially increase in scale in terms of annual EBITDA - Neutral free cash flow generation - EBITDA margin above 15% on a sustained basis - FFO-adjusted net leverage below 1.0x on a sustained basis Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Loss of current position in core markets - EBITDA margin below 10% on a sustained basis - FFO-adjusted net leverage above 2.0x on a sustained basis
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