Xinhua Far East China Ratings on Tuesday downgraded Dongfeng Electronic Technology (DET) from BBB- to BB+ domestic currency issuer credit rating and changes its rating outlook from stable to negative.
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Xinhua said it was prompted by its concern about the intensifying competition in China’s auto market and the resultant pressures on the DET’s’s OEM auto parts business and the supplier’s lagging market position, “with its comparatively small scale, weak R&D capabilities and loose cost controls”. The downgrade also took into account the company’s unstable cash flow status, impaired debt repayment capability and rising liquidity risk, Xinhua Ratings said in a statement.
It added that Dongfeng Motor Corporation’s (DFM) support for DET prevented a lower rating.
“DFM is willing and able to continue propping up the company in the short run; however, there are uncertainties in respect to its support in the long run as DFM itself faces even fiercer competition. The company’s rating outlook is changed to negative considering these uncertainties,” the statement said.
While DET’s sales to related companies accounted for more than 40% of its total sales annually from 2001 to 2005, during the same period, the CAGR of Dongfeng Tech’s turnover was lower than that of both related downstream automakers and the China auto industry average.
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By GlobalData“In Xinhua Far East’s view, the benefits from related parties will diminish, with internal purchases becoming increasingly market-oriented as automakers get squeezed by excess capacity and price wars,” the ratings firm said.
Xinhua Far East also noted that deteriorating debt positions and increasing liquidity risks weigh heavy on DET. By the end of 2005, Dongfeng Tech’s gross debt to total capital had risen to 52.3% from 26.1% in 2002, and its debt repayment ability had become significantly impaired with profit drying up over the previous years. Its EBIT interest coverage dropped from 8.2 in 2002 to 1.7 in H1 ‘05 and turned negative for the whole year of 2005. Current ratio recorded at 0.77 at the end of 2005.
DET announced plans to improve its performance through R&D enhancement and efficiency improvement, and Xinhua Far East expects it will keep looking for opportunities to boost the process and expand its product lines by setting up new joint ventures and M&As.
Xinhua Far East believes capital expenditure will rise, resulting in an even tighter cash flow.
Dongfeng Electronic Technology is one of the most significant auto part manufacturers in China and its two major shareholders are Dongfeng Motor, the third largest auto group in China, and Nissan Motor Company.
The Company operates as an OEM supplier to Dongfeng Motor Corporation. In 2004 and 2005, Dongfeng Tech’s turnover was RMB816 million and RMB904 million respectively, in which sales to related companies accounted for more than 40%.
Dongfeng Tech produces such parts as combined auto meters and related sensors, oil supply systems, brake systems and castings.
