Xinjiang Guanghui Industry Investment Ratings Affirmed On Enhanced Market Position But Higher Outlook Stable

Stocks and Financial Services Press Releases Thursday September 28, 2017 17:15
HONG KONG--28 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 28, 2017--S&P Global Ratings today affirmed its 'B' long-term corporate credit rating on China-based Xinjiang Guanghui Industry Investment (Group) Co. Ltd. (Guanghui). The outlook is stable. At the same time, we affirmed our 'B-' long-term issue rating on the company's U.S. dollar-denominated senior unsecured notes. The issue rating is one notch lower than the corporate credit rating, given a high level of structural subordination risk.

We believe Guanghui's market position has been enhanced following the acquisition of Baoxin Auto Group Ltd. (renamed to Grand Baoxin Auto Group Ltd.) in June 2016, driven by better geographic coverage and a more diversified brand portfolio. These strengths are tempered by the company's operations in China's highly competitive and fragmented auto retail industry.

We expect Guanghui's gross profit margin will marginally improve to 11.5%-11.9% in 2017-2018, from 11.4% in 2016, driven by a revenue mix gradually shifting to the high-margin services segment, and improved bargaining power from its larger scale. Nevertheless, we expect the EBITDA margin to remain stable at 6.6%-7.0%, from 6.9% in 2016, given potentially higher operating costs from an intensifying competitive landscape.

We anticipate the company's debt-to-EBITDA ratio to remain high at 8.6x-9.0x over the next 12-24 months, from 9.2x in 2016. This is based on our expectation that Guanghui will continue to undertake debt-funded network expansions in the auto segment, while maintaining its commitments to its capital-intensive energy and property businesses. In our view, the highly volatile energy and cyclical property segments will continue to pressure the group's cash flows and leverage, as reflected in our negative comparable rating analysis assessment.

The stable outlook on Guanghui reflects our expectation that the company will continue to shift its focus to higher-margin after-sales auto services and maintain its satisfactory market position in China's auto retailing market over the next 12 months. These factors will support its cash flow generation, in our view. However, we expect Guanghui's leverage will remain high due to its aggressive appetite for debt-funded expansion.

We could lower the rating if Guanghui's appetite for debt-funded expansion becomes more aggressive than we expect. We could also lower the rating if the company's liquidity were to deteriorate materially, which could happen if there is a greater reliance on short-term debt, or if the company's competitive position or profitability weakens due to intensifying competition.

We could raise the rating if the company demonstrates a prolonged track record of stabilizing performance in the more volatile energy and property segments. This would also include a stronger commitment to financial discipline regarding debt-funded acquisitions, and a strengthening liquidity position.

In a less likely scenario, we could also raise the rating if the company materially improves its leverage on the back of stronger profitability or more controlled expenditure, such that its debt-to-EBITDA ratio declines to below 5.0x on a sustainable basis.

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