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May 16 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Taiwan-based Acer Incorporated's (Acer) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BB' from 'BB+' and its National Long-Term Rating to 'BBB+(twn)' from 'A-(twn)'. The Outlook is Negative.
Key Rating Drivers
Weakened market position: The downgrade reflects the subdued outlook for the global PC industry and a continued deterioration in Acer's market position and low profitability. Acer continued to underperform global PC peers in revenue and margins. Its market position has consistently weakened since its market share peaked in 2010. According to IDC's data, Acer's worldwide PC shipments declined a steep 31% yoy in Q113, and its market share fell to 8% in Q113 from 10% in Q112.
Subdued demand: In common with other PC makers, Acer continues to confront a number of headwinds: weak economic growth in developed countries has extended the replacement cycle; substitution by smartphone and tablets has affected demand; newer Windows 8-based products have yet to make a significant impact; and fierce competition is driving down margins.
Depressed profitability: Weak margins will limit Acer's cash generation. Its operating EBIT margin hovered at just 0.1%-0.4% in 2012, compared with 0.7%-9.1% for rivals. The company is relying on its low-end tablets and touch notebooks to spur profitability. However, competition is increasing in these markets, and Acer may struggle to improve margins significantly. Fitch expects Acer's operating EBIT margin to remain below 1% (2012: 0.2%), in view of competitive pressure, loss of volume scale and high research and development expenses.
Leverage high: Fitch expects gross leverage to remain high. However, funds flow from operations (FFO)-adjusted leverage, while likely to remain high, should improve to below 5x in 2013 from 5.4x in 2012, through further debt reduction, disciplined capex and an improving free cash flow.
Sound liquidity: Acer's liquidity is strong; at end-December 2012 its cash balance of TWD50.6bn comfortably covered its total debt of TWD18.3bn. Fitch expects Acer to maintain sound liquidity with a net cash position over the medium term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- operating EBIT margin of 0.5% or below on a sustained basis
- FFO-adjusted leverage above 5x on a sustained basis
- negative free cash flow on a sustained basis
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- stemming both market share loss and revenue decline
- operating EBIT margin of 1.5% or above on a sustained basis
- FFO-adjusted leverage below 4x on a sustained basis
- pre-dividend FCF margin of 2% or above (2012: -0.1%)