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March 19 (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
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.
Positive: Future developments that may collectively lead to positive rating
- 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