Xinhua Far East China Ratings is reviewing the BB+ issuer credit rating of Fuyao Group Glass Industry (Fuyao) on review for a possible upgrade.
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The rating action was prompted by expectations that Fuyao’s capital expenditure will slow and its operating cash flow will improve as a result of its strengthening position in the domestic and global auto glass markets. A proposed private placement to Goldman Sachs would improve its debt repayment capacity, providing further support to its rating profile.
The company has now completed major production bases for the auto producer market, with its investments in auto glass capacity likely to slow after its Beijing and Guangzhou production bases are put into operation in 2007.
Still, there are some concerns over ongoing capital expenditure in its float glass lines in Hainan Province, especially considering the company’s historically aggressive investment record.
Its cash flow status has improved, with the gap between CFO and CFI (outflow) narrowing over the past nine quarters. This trend is expected to continue as a result of the company’s strengthening market position.
Revenues from its auto glass segment, which accounted for 74.3% of total revenues in 2006, rose from RMB1,064.2m in 2002 to RMB2,888.9m in 2006. The growth of this segment resulted not only from domestic sales but also from its global OEM business.
Domestic sales have grown as a result of growing auto sales and its leading market share. In the global OEM field, Fuyao has passed the verification process of major world-class auto manufacturers, including Ford and GM. Despite tough downstream competition, wavering domestic demand for sedans and RMB appreciation, its profit margins have remained comparatively stable, with its operating efficiency improving slightly.
A probable private placement to Goldman Sachs should also lead to an improvement in its debt repayment capacity.
“We also expect Goldman Sachs to help broaden Fuyao’s export channels, Xinhua Far East noted.
Fuyao Group Glass Industry is the largest auto glass maker in China and Cao Dewang, the president, and his wife, are the ultimate controllers of the company, holding a 53.93% stake.
The company has six auto glass production bases located near major domestic auto producers. Fuyao has also become an OEM supplier to Ford, GM, Volkswagen and Hyundai.
