Moody's Investors Service said BAIC Motor Corporation's profit warning for the year ended 31 December 2017 is credit negative for BAIC Group.
However, the announcement will not immediately affect BAIC Group's Baa2 issuer rating or the Baa2 senior unsecured rating on the bonds issued by its subsidiary, BAIC Inalfa HK Investment, and guaranteed by BAIC Group.
Go deeper with GlobalData
The ratings outlook remains stable.
BAIC Motor, in which BAIC Group owned a 44.98% stake at the end of June 2017 and which represents the key profit contributor for BAIC Group, issued the profit warning this week.
BAIC Motor expects its net profit to have fallen by about 65% year on year during 2017, due mainly to the decline in the sales and results of its Beijing Hyundai Motor unit and its
Beijing Brand own brand passenger vehicles business.
"While BAIC Motor's anticipated decrease in net profit will negatively affect BAIC Group, we believe the negative impact will be short term, given that the year over year decline in sales by Beijing Hyundai moderated during 2H 2017 versus 1H 2017," said Moody's senior analyst Gerwin Ho.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataHyundai Motor Company's (Baa1 stable) weak auto sales in China (A1 stable) were driven by the political tensions that emerged between Korea (Aa2 stable) and China in March 2017.
Beijing Hyundai had posted a fall in unit sales of 31% year on year in 2017, according to Hyundai Motor, but the magnitude of the decline was narrower than the 42% year on year in 1H 2017. This was because sales had begun to recover during 2H 2017.
Moody's expects Hyundai Motor and Beijing Hyundai's sales performance in China to continue to recover over the next 12-18 months.
Moody's notes that it took 12-18 months for Japanese auto companies to recover their market shares in China after political tensions escalated between Japan (A1 stable) and China in 2012.
While Moody's expects BAIC Group's debt leverage – as measured by adjusted debt/EBITDA – to have risen in 2017, as a result of the lower EBITDA contribution from Beijing Hyundai, the company's leverage is expected to trend down towards 5.0x in 2018, as Beijing Hyundai's sales and EBITDA contribution recover and normalise.
The Baa2 ratings incorporate BAIC Group's BCA of ba1 and a two-notch uplift based on Moody's expectation — under Moody's joint default analysis approach for government-related issuers — that the company will receive extraordinary support from the Beijing municipal government, if needed.
BAIC Group's BCA could be under pressure if the company expands its capacity rapidly, the company undertakes debt-funded acquisitions, and/or Beijing Hyundai's sales and results fail to recovery and normalise, such that its debt/EBITDA fails to trend down to 5.0x over the next 12-18 months.
Beijing Automotive Group is one of the top five automakers in China in terms of unit sales. It recorded sales of 2.5m units in 2017, according to the China Association of
Automobile Manufacturers.
The company has a comprehensive product line-up, spanning passenger and commercial vehicles. Its key joint ventures for passenger vehicles include Beijing Benz Automotive and Beijing Hyundai Motor.
