Cheng Shin Rubber Ind. Co. Ltd. Assigned #BBB-# Outlook Stable

Stocks and Financial Services Press Releases Tuesday October 4, 2016 16:57
TAIPEI--4 Oct--S&P Global Ratings

TAIPEI (S&P Global Ratings) Oct. 4, 2016--S&P Global Ratings said today it had assigned its 'BBB-' long-term corporate credit rating and 'cnA-' long-term Greater China regional scale rating to Cheng Shin Rubber Ind. Co. Ltd. (CST).

The outlook on the long-term rating is stable.

"The ratings on CST reflect the company's above-average profitability supported by CST's good operating efficiency, fair and growing market position particularly in China's tire market, good product and customer diversity, and low debt leverage," said S&P Global Ratings credit analyst Raymond Hsu. "These strengths are partly offset by high industry risks, including intense competition and volatile raw material prices, as well as CST's weaker technology, scale and branding power than its larger global peers'."

We believe CST will maintain its above-average profitability over the next one to two years. The company derives its good profitability from its good operating efficiency and cost competitiveness. We expect CST's low-cost facilities in China, a high portion of sales to the replacement market, and high capacity utilization to continue to support its good profitability over the next one to two years. In addition, we expect the company's bicycle and motorcycle tire sales to continue to generate a higher profit margin than the company's average due to CST's strong brand name and leading market share in this product segment.

We expect CST to slightly enhance its global market share through acquiring additional market share, particularly in China's car tire market over the next one to two years. We believe the company's strengthening branding power and strong distribution network, particularly in China, and new capacity in India and Indonesia will enable CST to sustain its global market share over the next two years. This is even though weaker demand for the company's truck and bicycle tires, particularly in China amid a slowing economy, has stalled growth in its global market share over the past one to two years.

However, we expect CST's market position in the global tire market to remain relatively limited over the next one to two years, particularly in the passenger car radial tire market due to the company's weaker, albeit improving, technology and brand image compared with its larger global peers'.

CST is also likely to remain focused on value and mid-tier tires and compete with its larger peers by competitive pricing over the next one to two years. The company is also likely to continue to have a smaller portion of sales to auto assemblers than its larger peers due to its weaker brand power and strategy of placing more emphasis than its larger peers on the replacement market in order to maintain higher margins. CST was the world's ninth largest tire maker in the world and the fourth largest in China in 2015 by revenue.

"We expect CST to maintain better product and customer diversity than its larger peers due to the company's strong brand name and leading market share in the bicycle and motorcycle tire segment," said Mr. Hsu. "This is despite our expectation that CST's passenger car radial tire sales will grow faster among its product portfolio over the next two years following significant capacity additions."

In 2015, passenger car radial tires accounted for about 44% of CST's total revenue, truck and bus tires 16%, motorcycle tires 14%, bicycle tires 8%, tubes 7%, and others 11%-12%. We believe CST's reliance on China's tire market will continue to partly offset the company's strength in product and customer diversity. China accounted for about 57% of the company's revenue in 2015.

However, we do not expect this geographical concentration to cause additional business volatility over the next one to two years due to the company's diversified product mix and strengthening market position.
CST will continue to experience high industry risk over the next two years, in

our view. The global and regional tire market is highly competitive and highly fragmented. Meanwhile, the industry's profitability is highly sensitive to volatile rubber prices due to tire makers' limited ability to raise tire prices to cover rising material costs, resulting in significant volatility in the company's profit margins. China's tire market is particularly competitive and fragmented because high demand growth has attracted significant capacity additions by all major global tire makers. Based on these factors, we have assessed CST's business risk profile as fair.

"The rating outlook is stable, based on our expectation that CST's strengthening product and client mix, as well as lower raw material costs will enable the company to sustain its EBITDA margin at 26%-30% and maintain a debt-to-EBITDA ratio of less than 1.5x over the next one to two years," added Mr. Hsu. "This is despite our view that the slowing market in China will continue to limit CST's sales growth and pressure the company's EBITDA margin, despite its market share gain."

We may lower the rating if CST takes on more aggressive capital expenditure than we expect, or if its profitability weakens, such that CST's credit ratios weaken substantially. A ratio of debt to EBTIDA above 2x on a sustainable basis would indicate such deterioration. We may also lower the rating if the company fails to maintain its cost competitiveness or brand strength. A substantial decline in the company's EBITDA margin relative to its peers' or an EBITDA margin below 15% for an extended period would indicate such deterioration.

We may raise the rating if CST continues to significantly strengthen its competitive position and reduce volatility in profitability through business cycles. Growth that is faster than the industry average or CST's successful execution of its expansion plan outside China while maintaining a ratio of debt to EBITDA below 1.5x could indicate such improvement.


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