Xinhua Far East Downgrades Shanghai Automotive Co. Ltd from A- to BBB+ Issuer Rating, Rating Outlook Changed from Stable to Negative
HONG KONG, March 20 /Xinhua-PRNewswire/ -- Xinhua Far East China Ratings today downgraded Shanghai Automotive Co. Ltd ("Shanghai Auto" or "the Company", SH A 600104) from an A- to a BBB+ domestic currency issuer credit rating. The rating outlook also was changed from stable to negative.
The rating action was prompted mainly by Xinhua Far East's view about the diminishing attractiveness of China's sedan market due to lower-than-expected demand growth and overcapacity, both of which have had a negative impact on auto parts suppliers. Xinhua Far East expects that this situation will continue to squeeze Shanghai Auto's profit margin and cash generating ability. In particular, its heavy reliance on sales to Shanghai Volkswagen ("SHVW") and Shanghai General Motors ("SGM") exposes it to rising market risks and stretches its financial flexibility, with dues from major clients increasing rapidly.
Xinhua Far East also believes that its recent investments in sedan-making might increase its business risks and will require significant capital expenditure. Its non-floating share reform plan could also weigh on its cash position in future years.
Even so, Xinhua Far East notes that the Company's debt repayment ability remains comparatively strong. The BBB+ long-term issuer credit rating reflects the Company's current position as one of the largest and most efficient domestic auto parts suppliers in China, its very low debt burden and adequate financial flexibility.
As supply is increasingly diverging from demand, China's sedan sector faces significant long-term downward pricing pressures. This situation is also made possible by softened input costs and cost management improvement potential for the entire value chain. These adverse developments in the sedan sector will create continual pressures on auto parts suppliers.
Xinhua Far East also notes that Shanghai Auto still relies heavily on sales to SHVW and SGM, although the percentage dropped to 62.5% of total sales in 3Q05. With competition intensifying in China's sedan market, concerns are increasing as to how German Volkswagen will balance its support to SHVW and FAW Volkswagen (JV by German Volkswagen and China FAW Group Corp.) as they are already engaged in across-the-board competition. There are also doubts about whether SGM will be able to sustain its level of sales when a new government policy relating to energy-saving vehicles is implemented. These could further cloud Shanghai Auto's future. In particular, client concentration has impaired Shanghai Auto's negotiation capability and depressed its operating cash flow, with the amount of dues from downstream auto makers starting to accumulate above that of upstream manufacturers.
Shanghai Auto's outlook is changed from stable to negative. Moving forward, Xinhua Far East will continue to closely monitor the performance of Shanghai Auto's core clients, its R&D development and its proposed efficiency improvements.
Shanghai Automotive Co. Ltd. is one of the largest auto parts manufacturers listed domestically in China. Shanghai Automotive Industry Corporation (Group), one of the big three auto makers in China, ultimately held a 67.659% interest in the Company as of October 28, 2005. The Company operates as a major OEM supplier to SHVW and SGM, with sales to SHVW and SGM accounting for more than 60% of its total.
Shanghai GM (SGM) is a JV, with Shanghai Automotive Industry Corporation (Group) and General Motors each holding 50% of equity. Shanghai GM currently has an annual capacity of 480,000 finished vehicles, 100,000 automatic transmissions and 375,000 engines. According to the China Association of Automobile Manufacturers, Shanghai GM sold 298,600 sedans in 2005, making it the biggest sedan maker in mainland China.
Shanghai Volkswagen (SHVW) is also a JV, with Shanghai Automotive Industry Corporation (Group) and Volkswagen Group each possessing a 50% stake. SHVW is estimated to have an annual capacity of around 550,000 finished vehicles. According to the China Association of Automobile Manufacturers, Shanghai VW sold 244,700 sedans in 2005, the nearest follower behind Shanghai GM.
FAW Volkswagen (FAW VW) is a JV, with China FAW Group Corporation holding a 60% stake and Volkswagen Group holding 40%. FAW VW has an annual capacity over 450,000 finished vehicles. According to the China Association of Automobile Manufacturers, FAW VW sold 238,300 sedans in 2005, seating the third position in mainland China.
Shanghai Automotive Co. Ltd (SH A 600104) is a large cap company constituting the Xinhua/FTSE China A50 Index. As of March 17, 2006, its total market cap equaled RMB 12.1 billion with investable market cap of RMB 6.04 billion.
For the rating report summary, please visit http://www.xinhuafinance.com/creditrating .
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About Xinhua Far East China Ratings
Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003.
Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East's rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosures and transparency in China market. For more information, see http://www.xfn.com/creditrating .
About Xinhua Finance Limited
Xinhua Finance Limited is China's unchallenged leader in financial information and media, and is listed on the Mothers board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial markets and the world, Xinhua Finance serves financial institutions, corporations and re-distributors through four focused and complementary service lines: Indices, Ratings, Financial News and Investor Relations. Founded in November 1999, the Company is headquartered in Shanghai with 21 news bureaus and offices in 18 locations across Asia, Australia, North America and Europe. For more information, please visit http://www.xinhuafinance.com/ .
About Shanghai Far East Credit Rating Co., Ltd
Shanghai Far East Credit Rating Co., Ltd. is the first and leading professional credit rating company with comprehensive business coverage in China. It is an independent agency established by the Shanghai Academy of Social Sciences with the mission to develop internationally accepted standards for capital market in China. The company is a pioneer in conducting bond- rating business in China. For years, it has been authorized by the Shanghai branch of the PBOC to undertake loan certificate credit rating.
Since establishment, it has rated over 1,000 corporate long-term bonds and commercial papers, based on the principles of objectivity, fairness and independence. The company has also maintained over 50% market share in the loan certificate-rating sector in Shanghai for three consecutive years. With its strong local presence and knowledge, it provides investors with unique and the most insightful credit opinion. For more information, see http://www.fareast-cr.com/ .
For more information, please contact: Hong Kong Joy Tsang, Corporate & Investor Communications Director, Xinhua Finance Tel: +852-3196-3983, +8621-6113-5999 or +852-9486-4364 Email: joy.tsang@xinhuafinance.com US David Leeney, Taylor Rafferty (IR/PR Contact in US) Tel: +1-212-889-4350 Email: david.Leeney@taylor-rafferty.com
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