September 27, 2017 / 3:40 AM / a year ago

Fitch Affirms Dongfeng Motor Group at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, September 26 (Fitch) Fitch Ratings has affirmed Chinese automaker Dongfeng Motor Group Company Limited's (DFG)'s Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A'. The Outlook on the IDR is Stable. The agency also affirmed the rating on the senior unsecured notes issued by Dongfeng Motor (Hong Kong) International Co., Ltd. and guaranteed by DFG at 'A'. The affirmation follows the agency's upgrade of DFG's standalone credit profile to 'BBB+' from 'BBB', while the previous three-notch uplift has been changed to a two-notch uplift, reflecting the agency's reassessment of DFG's operational and strategic linkage with the central government, through its parent, Dongfeng Motor Corporation (DFM). This results in the final rating unchanged at 'A.' DFM, which owns 66.86% of DFG, is a wholly owned subsidiary of the State-owned Assets Supervision and Administration Commission (SASAC) and one of three automotive manufacturers owned and supervised by the state. DFG's rating is equalised with DFM's due to strong parent and subsidiary linkage. The upgrade of DFG's standalone rating comes after DFM, as a group, has demonstrated its ability to retain its market leadership as the second-largest automaker in China and maintained business stability across market cycles, especially amid an industry-wide slowdown of auto sales in 1H15 and 1H17, backed by a well-balanced brand and product portfolio. In particular, its leadership in China's fast-growing, margin-rich sport utility vehicle (SUV) segment has provided it with a sufficient buffer in market downturns. At the same time, DFM has maintained a strong financial profile that maps to the 'A' category. Fitch proportionately consolidates DFM's joint ventures to assess the group's credit profile. The reassessment of DFM's linkage with the central government follows a comparison with other SASAC-owned state-owned enterprises (SOEs) that are rated with a three-notch uplift from their standalone credit profiles, including CRRC Corporation Limited (A+/Stable), China Shenhua Energy Company Limited (A+/Stable) and CNOOC Limited (A+/Stable). These companies have more dominant market positions in strategic sectors or play more influential roles in helping the central government to achieve its policy objectives than DFG/DFM. KEY RATING DRIVERS Demonstrated Stable Business: DFM's net revenue grew 7.4% to CNY268 billion in 2016 and its EBITDA margin improved to 9.0% from 8.8% in 2015 on a proportionately consolidated basis. DFM's two Sino-Japanese joint ventures (JVs) performed well with sound growth and stable margins. Rapid growth at Dongfeng Honda, its JV with Japan's Honda Motor Co., Ltd (A/Stable), led to improved profitability that was more than enough to offset the weakness in DPCA, DFG's JV with the Paris-based Peugeot S.A. (BB+/Stable). DFM remained the second-largest player in China with 15.3% of total vehicle sales volume in 2016. JV Diversification Lowers Business Risk: DFM operates through multiple JVs carrying different brands, including Honda, Nissan, Infiniti, Peugeot, Citroen, Renault and Kia. The JV structure helps to lower its business risks from heavy R&D expenditure or new product failures, while its well-diversified brand portfolio cuts the risks associated with customer preference, brand reputation and geo-politics. Sustained SUV Leadership: DFM has kept its No.1 position among all Chinese auto groups in the medium-sized SUV market over the past six years and has rapidly built up its share to become a leading producer in the small-sized SUV market since 2015. We believe DFM's leadership in the fast-growing, margin-rich SUV market will provide it with a sufficient buffer in market downturns as consumers have shown a strong preference for SUVs amid the rapidly changing demand dynamics of China's passenger vehicle market. The SUV market has sustained a strong CAGR of 45.8% from 2012 to 2016, while the sedan market has been through multiple cycles of sales decline and recovery. Strong FCF, Net Cash Balance: DFM's net cash balance increased to CNY55.6 billion as of end-2016 from CNY43.1 billion at end-2015 on a proportionately consolidated basis. DFM sustained strong FCF generation in 2016, thanks to a solid FFO margin, improved working capital days, moderate capex needs and stable dividend payments. DFM's major JVs contributed around CNY10 billion in cash dividends in 2016. Moderate Strategic Linkage with Government: SASAC and the central government have demonstrated a commitment to support DFM in becoming the flagship automobile company in China and are ready to provide strong policy and financial support should it run into difficulties. However, the social impact of a DFM default, in terms of employment or social unrest, is assessed to be relatively moderate, compared with other central state-owned enterprises (SOEs) with dominant positions in less commercialised sectors. We expect DFM to maintain moderate operational and strategic linkages with the central government as DFM is responsible for carrying out the central government's strategic objectives in developing the automotive industry. DERIVATION SUMMARY DFG's rating is equalised to its parent DFM, which is based on a standalone rating of 'BBB+' plus a two-notch uplift reflecting DFM's moderate operational and strategic linkages with the central government. DFM/DFG's business profile is comparable with industrial manufacturing companies in China in the 'BBB' category in terms of scale and market position, such as Weichai Power Co., Ltd. (BBB+/Stable), but weaker than 'A-' rated companies such as CRRC Corporation (A+/Stable, standalone A-) that have dominant market positions in their respective industries. DFM/DFG's business risk is comparable with its 'BBB+' rated global peers, such as Hyundai Motor Company (BBB+/Stable) and Nissan Motor Co., Ltd. (BBB+/Stable), given its multiple-JV structure and well-diversified brand and product portfolio, despite its relatively small scale and limited geographical diversification outside of China. DFM's financial profile is within the 'A' category with its stable FFO margin, sustained positive FCF and deep net cash position. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - JV structure remains the main form to enter the Chinese market for foreign auto players - Top-line growth rate sustained at around mid-single digits - Margin to increase slightly in the next three years due to higher revenue contribution from higher-margin JVs - Dividend payout ratio of around 8%-10% RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Positive rating action is not expected in the medium term as it would require a major change of business profile, including global diversification. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Weakening linkage with the SASAC. -Sustained deterioration of its business profile, including material adverse regulatory developments. - DFM - excluding JVs - generates negative free cash flow on a sustained basis and/or loses its net cash position. LIQUIDITY Strong Liquidity: As of end-2016, DFM and DFG had total unutilised credit facilities of more than CNY40 billion (out of which CNY26 billion was granted to DFG) and CNY41.5 billion of unrestricted cash (JV cash excluded). Strong Access to External Financing: DFM/DFG's status as a leading central SOE has enabled it to enjoy good relationships with domestic banks and obtain easy access to both onshore and offshore capital market financing. Its refinancing risk is low. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Cathy Chao Associate Director +852 2263 9967 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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