July 5, 2017 / 10:06 AM / 15 days ago

Fitch Downgrades CAR Inc. to 'BB-'; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG/SHANGHAI, July 05 (Fitch) Fitch Ratings has downgraded China-based auto rental group CAR Inc.'s Long-Term Issuer Default Rating (IDR), senior unsecured rating and the rating on CAR Inc.'s outstanding bonds to 'BB-' from 'BB'. The Outlook is Stable. The downgrade reflects weaker prospects for margin due to the company's aggressive pricing strategy as well as declining fleet rental revenue from UCAR, CAR Inc.'s largest shareholder and biggest customer. Fitch believes Car Inc's ongoing and substantial related-party transactions with UCAR are a credit weakness. While the agency expects UCAR's revenue contribution in the rental business to decline, related-party transactions are likely to remain high, as UCAR's Shenzhou Maimaiche business has become CAR Inc's main channel for used-car sales. KEY RATING DRIVERS Significant Related-Party Transactions: UCAR, a leading Chinese business-to-consumer ride sharing company, is both the largest shareholder and largest customer of CAR Inc. UCAR accounts for around 30%-40% of CAR Inc.'s rental revenue and 60% of its used-car sales. Fitch expects UCAR's fleet rentals from CAR Inc. to decrease in 2017 due to regulatory changes, but UCAR's used-car purchases from CAR Inc. have increased significantly following its 2016 acquisition of Shenzhou Maimaiche, a used-car sales platform. Fitch believes CAR Inc's ongoing related-party transactions with UCAR are a credit weakness. UCAR operates in China's rapidly evolving and hyper-competitive ride-sharing industry and has yet to break even on an EBITDA level. UCAR's losses narrowed in 2016 and the company has ample liquidity following several rounds of fundraising over the past year, but its credit profile remains substantially weaker than that of CAR Inc. Short-Term Margin Pressure: Fitch expects CAR Inc.'s operating margins to weaken slightly in 2017 from the previous year and the agency's previous expectations. Revenue from the fleet rental business to UCAR is likely to shrink in 2017 and this segment has historically incurred lower operating expenses. In addition, CAR Inc. cut its car rentals business pricing by more than 20% in 1Q17 to raise utilisation rates and squeeze competitors. So far the company has successfully raised utilisation rates to offset the revenue impact of lower prices, but we think this strategy may eat into margins over time. Finally, CAR Inc. plans to speed up the fleet renewal process to improve user experience, which may translate into higher capex and depreciation expenses. Strong Market Position, Healthy Financials: CAR Inc.'s ratings are supported by its top market position in China's fast-expanding car rental market, with roughly double the fleet size and revenue of its next-largest competitor, eHi Car Services Limited (BB-/Negative). Fitch expects CAR Inc.'s leverage and coverage ratios to remain strong, with FFO-adjusted net leverage staying at around 2.0x-2.5x; a comfortable level for its 'BB-' rating. DERIVATION SUMMARY CAR Inc.'s ratings are supported by its leading market position and healthy credit metrics, but constrained by its large exposure to UCAR, which is both its largest customer and shareholder, and has a weaker credit profile. Compared with Localiza Rent a Car S.A. (BB+/Negative), Brazil's leading car rental operator, CAR Inc. has similar operating scale and margins, but higher financial leverage. Compared with eHi, CAR Inc. has a better market position and stronger credit metrics, but has higher revenue concentration risk from its exposure to one large customer, UCAR. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - 42,500 cars added and 27,500 vehicles disposed in the car rentals segment in 2017 - Stable average daily rental revenue per car rental vehicle from 1Q17 of CNY165 - Fleet rental fleet to shrink to 18,000 by end-2017, from 21,761 at end-1Q17 and 24,330 at end-2016 - 58%-59% EBITDA margin for the rental business, excluding used-car disposals, for 2017. (2015-2016 average: 57%-60%) - No further gain or loss on disposal (aside from actual reported in 1Q17) - No further share buybacks (aside from actual buybacks as of June 2017) RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - UCAR generates sustained positive EBITDA, or contributes less than 20% of CAR's revenues - Sustained positive free cash flow Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage sustained above 3.0x - FFO fixed charge coverage sustained below 3.0x - Rentals EBITDA margin (excluding used car sales) sustained below 40% LIQUIDITY Comfortable Liquidity: CAR Inc. had CNY5.7 billion in cash and cash equivalents at end-2016 and CNY2.7 billion in available undrawn facilities. This is more than sufficient to cover its short-term debt of CNY2.4 billion. FULL LIST OF RATING ACTIONS CAR Inc. - Long-Term Foreign-Currency IDR downgraded to 'BB-' from 'BB'; Outlook Stable - Senior unsecured rating downgraded to 'BB-' from 'BB' - USD500 million 6.125% senior notes due 2020 downgraded to 'BB-' from 'BB' - USD300 million 6.000% senior notes due 2021 downgraded to 'BB-' from 'BB' 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 Li Chen Analyst +86 21 5097 3009 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments: Share-based compensation excluded from EBITDA. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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