(The following statement was released by the rating agency)
Oct 25 -
Summary analysis -- China Automation Group Ltd. ------------------- 25-Oct-2012
CREDIT RATING: BB-/Negative/-- Country: China
Credit Rating History:
Local currency Foreign currency
06-Apr-2011 BB-/-- BB-/--
The rating on China Automation Group Ltd., a China-based industrial safety and
critical control systems provider, reflects the uncertainty over the prospects
for China's railway industry, the company's limited revenue base, and its high
customer concentration. In addition, China Automation's technology base is
weaker than leading global peers'. The company's dominant position in its
niche petrochemical and railway control systems market in China tempers these
weaknesses. The high entry barriers to these industries in China offer
additional rating support.
China Automation's business risk profile is "weak," in our view. This is
because our outlook for the railway industry remains uncertain, despite some
signs of recovery in the past few months. Following a major train accident at
Wenzhou in July 2011, the government put the bidding for many new projects on
hold. In addition, many national railway projects were either suspended,
slowed down, or delayed. These events significantly affected China Automation
because the railway segment accounted for about half of the company's total
revenues in the past two years. Revenues from signaling systems declined 51.6%
to Chinese renminbi (RMB) 144.9 million because of the accident, and China
Automation's net profit for the first six month of 2012 dropped 28% year over
year, as we expected.
We anticipate that the company's profitability will remain under pressure
during the rest of the year as well. The National Development and Reform
Commission recently approved several infrastructure projects including rail
projects, which could have some positive effects on China Automation's
We believe China Automation will continue to face delays in payments from its
clients, particularly the Ministry of Railways, over the next few quarters.
The company's liquidity position could weaken unless it effectively manages
its working capital. Similarly, China Automation's leverage could increase if
the company takes on a significant amount of debt to meet potentially rising
working capital needs. However, we expect the company's excess cash and
internal cash flows from its petrochemical business to moderate the likely
increase in debt.
China Automation's acquisition of Wuzhong Instrument Co. Ltd. will enhance the
company's product mix and expand its revenue base. However, the company still
has a limited client base. Despite China Automation's long relationships with
its clients, any change in government policy that delays or cuts back project
planning will hurt its operating performance.
China Automation lacks key hardware technology for more advanced automation
systems. The company has a satisfactory technology base, particularly in
software and system integration, in the domestic market. We expect China
Automation to continue to expand through strategic alliances with foreign
We expect China Automation to maintain its leading market position in safety
and critical control systems in the petrochemical and railway industries due
to the industries' high entry barriers. The high specialization required to
develop petrochemical safety and control systems, high switching costs, and
China Automation's proven record create the high entry barriers. The
government's license and certification requirements for the supply of railway
signaling and safety systems also deter potential new entrants. The company's
order backlog at the end of June 2012 is about RMB2.1 billion, of which 60% is
from the petrochemical segment and 40% from the railway segment.
China Automation's financial risk profile is "aggressive," in our opinion. The
company's leverage has increased over the past year. Leverage could increase
further in the next 12 months if China Automation uses debt to fund
potentially higher working capital needs. According to our base-case scenario,
the company's ratio of total debt to EBITDA is likely to weaken to 3.6x-4.2x
in 2012, from 3.6x in 2011.
China Automation's liquidity is "adequate," as defined in our criteria. We
expect the company's sources of liquidity to cover its uses by more than 1.2x
in the next 12 months. Our assessment of liquidity is based on the following
factors and assumptions:
-- China Automation's sources of liquidity include cash and funds from
-- As of June 30, 2012, the company has cash and cash equivalents of
about RMB548 million and short-term debt of about RMB334 million.
-- The company's uses of liquidity include planned capital expenditure,
working capital needs, debt repayments, and dividend distribution.
-- We expect net sources to remain positive even if EBITDA declines by
China Automation has uncommitted bank facilities from several banks. The
company's outstanding debts do not have financial covenants.
The negative outlook reflects the uncertainty surrounding a timely execution
of the government's railway investment plan over the next 12 months. The
outlook also reflects our view that China Automation's debt could increase or
that its liquidity position could weaken due to higher working capital needs.
We could lower the rating if China Automation fails to maintain its
profitability and leverage. A ratio of total debt to EBITDA consistently above
4x would indicate such weakening. This could happen if the execution of
railway investments continues to be delayed or the company takes on
significant debt to fund its increasing working capital.
We could revise the outlook to stable if China Automation maintains its
profitability and leverage. A ratio of total debt to EBITDA consistently below
4x would indicate such stability. This could happen if: (1) railway
investments progress in a meaningful and timely manner over the next 12-18
months; and (2) the company does not significantly increase its debt to fund