(The following statement was released by the rating agency)
Dec 10 -
Summary analysis -- Kowloon Motor Bus Co. (1933) Ltd. ------------- 10-Dec-2012
CREDIT RATING: A/Stable/-- Country: Hong Kong
Primary SIC: LOCAL AND
Credit Rating History:
Local currency Foreign currency
13-Jan-2002 A/-- A/--
The rating on Kowloon Motor Bus Co. (1933) Ltd. (KMB) reflects the company’s strong market position, stable earnings from bus operations, strong cash balances, stable operating cash flows, and low debt leverage. KMB’s exposure to volatile fuel prices, the limited growth prospects of its Hong Kong bus operations, and increasing competition between bus and rail operators partly offset these strengths.
We view KMB as an integrated economic entity of its parent, Transport International Holdings Ltd. (TIH). Accordingly, our ratings on KMB reflect the group’s credit profile. KMB is a wholly owned subsidiary of TIH and accounted for 70%-80% of the group’s EBITDA (excluding investment activities) over the past three years.
We have revised our assessment of KMB’s business risk profile to “satisfactory” from “strong” to reflect heightened industry risk and weakened profitability. In 2011, KMB had a 67.7% share of the franchised bus market and 21.5% of the public transport market in Hong Kong. We expect the company’s passenger numbers to remain stable for the next two years because no new rail lines are scheduled to open within KMB’s service area in that time span. Over the longer term, the commissioning of a new rail line--from Shatin to Central--is likely to weaken KMB’s share of the public transport market. The new line is likely to be fully operational by 2020.
TIH’s strong cash balances, stable operating cash flows, and low debt leverage support our assessment that its financial risk profile is “minimal.” In our base-case scenario, we expect TIH’s adjusted ratio of total debt to EBITDA to be 0.7x-1.2x and its adjusted ratio of total debt to total capital to stay at 10%-12% in 2012 and 2013. In our assumption, we expect that patronage will remain stable or show only slight growth over the period since no new rail lines are scheduled to open and because of extended concessions (from weekends to seven-days-a-week) for the elderly. We also expect fuel prices to stay at their current high levels.
KMB’s profitability remains sensitive to macroeconomic factors such as fluctuations in oil prices and labor costs. The company’s financial performance continued to weaken in the first half of 2012 due to high fuel costs. Competition from rail, and higher wages, tunnel tolls, and other operating expenses also hurt the company’s financial performance. Although KMB has some financial protection, given an existing fare-adjustment arrangement for the franchised bus industry, timeliness of compensation is subject to ultimate government approval. The arrangement stipulates a reasonable rate of return calculated at 9.7% of average net fixed assets. In November 2012, the company applied for an 8.5% fare increase. KMB previously applied for an 8.6% fare increase in 2010, but received approval for a rise of only 3.6%, effective May 15, 2011.
In our view, TIH’s non-residential joint development project at Kwun Tong with its largest shareholder, Sun Hung Kai Properties Ltd. (SHKP; A+/Negative/--; cnAAA/--), will have a limited impact on TIH’s credit risk profile. The total project cost of about Hong Kong dollar (HK$) 3.6 billion over the next few years will be shared equally between TIH and SHKP’s subsidiaries.
We view TIH’s liquidity as “strong,” as defined in our criteria. TIH’s liquidity should more than cover the company’s needs in the near future, even if EBITDA declines sharply. As of June 30, 2012, the company has HK$3.12 billion in cash and cash equivalents against total short-term debt of HK$200 million.
Our liquidity assessment is based on the following factors and assumptions:
-- We expect the company’s liquidity sources (including cash, funds from operations, and available credit facilities) over the next 12-18 months to exceed its uses by more than 3.5x.
-- Debt maturities over the next few years are minimal.
-- Even if EBITDA declines by 50%, we believe net sources would be more than double cash requirements.
-- The company has good banking relationships and a good standing in the credit markets.
In our analysis, we assumed liquidity of about HK$4.3 billion over the next 12 months, consisting of cash, funds from operations, and availability under credit facilities. We estimate the company will use about HK$1.1 billion during the same period for capital spending, debt maturities, working capital needs, and dividends.
The stable outlook reflects our expectation that TIH’s financial performance will remain strong and that new railway lines will not significantly affect KMB’s market share over the next 24 months. In addition, we anticipate that KMB will continue to improve efficiency by cutting costs and rationalizing routes amid increasing fuel price volatility. The company has some headroom to take on more debt, given the stability of its business operations.
We could lower the rating if rapidly rising fuel oil prices affect KMB’s profitability, such that the company incurs losses for consecutive quarters without any sign of recovery. We could also lower the rating if unfavorable government policies affecting KMB’s franchised public bus operations, a substantial deterioration in passenger numbers, or a more aggressive investment strategy hurt KMB or TIH’s financial profiles, such that the group’s debt to EBITDA increases to more than 1.5x on a lasting basis. We could also lower the rating if TIH adopts a more aggressive financial policy to support growth of its non-bus operations.
KMB has limited growth potential within Hong Kong and new railway lines have a continuing impact on patronage. However, we could raise the rating if KMB can further increase its business diversity and profitability through initiatives to effectively control costs, obtain timely tariff rate changes from the government, and generate quality earnings from non-bus operations, while maintaining conservative financial policies that ensure a net cash position and debt to EBITDA of less than 1.5x.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28. 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008