Zhongsheng Group Holdings Limited -- Moody's assigns Baa3 to Zhongsheng's senior unsecured notes
Rating Action: Moody's assigns Baa3 to Zhongsheng's senior unsecured notes
Global Credit Research - 04 Jan 2021
Hong Kong, January 04, 2021 -- Moody's Investors Service has assigned a Baa3 senior unsecured rating to the proposed USD notes to be issued by Zhongsheng Group Holdings Limited (Baa3 stable).
The rating outlook is stable.
Zhongsheng will use the proceeds from the proposed issuance for refinancing and general working capital purposes.
RATINGS RATIONALE
"The proposed issuance will not impact Zhongsheng's Baa3 issuer rating or the stable outlook, because most of the proceeds will be used to refinance existing debt, while the issuance will also improve the company's debt maturity profile," says Roy Zhang, a Moody's Vice President and Senior Analyst, and also Moody's Lead Analyst for Zhongsheng.
The issuance is a reflection of management's financial prudence as it further diversifies its funding channels and improves its liquidity profile.
Zhongsheng's Baa3 rating reflects its strong position in China's (A1 stable) auto dealership market, its large dealership network, favorable brand and market exposure and efficient operational management, which have contributed to its steady business performance.
The rating also reflects Zhongsheng's sound financial profile, prudent financial policy and linkage with its strategic shareholder, Jardine Strategic Holdings Limited (Jardine Group, A1 stable).
Zhongsheng benefits from a resilient business model. New auto sales, which are more cyclical in nature, made up only about 20% of the company's total gross profit in 2019. Meanwhile, gross profit from recurring maintenance services was able to fully cover all its expenses in 2019, improving its business flexibility.
However, Zhongsheng's Baa3 rating also takes into account the company's high reliance on short-term financing and its high capital needs as it expands its business organically and through acquisitions. These risks are partially mitigated by the company's strong business profile and track record of taking a balanced approach to growth. Even as it achieved robust revenue growth, its adjusted debt-to-leverage ratio was sustained at 2.6x at the end of 2019, a metric solid for its rating level.
Moody's expects Zhongsheng to maintain a prudent financial policy, which is critical to support its rating, and that its leverage will remain around 2.5x-3.0x over the next 12 to 18 months.
Zhongsheng's cash on hand and operating cash flow are inadequate to meet its financial obligations within the next 12 to 18 months. Much like other companies in the auto dealer industry, Zhongsheng faces high working capital requirements and will need to obtain short-term financing to fund them. However, it has demonstrated its funding capacity, with established banking relationships and multiple funding channels, including bank loans, syndicated loans both onshore and offshore, equity, convertible bonds, and automaker financing.
Zhongsheng is also strategically important to several established automakers such as Toyota Motor Corporation (A1 negative) and Daimler AG (A3 negative) and has contributed a significant portion of sales for the two brands. Moody's expects Zhongsheng will continue to enjoy working capital flexibility because of its solid business relationship with these automakers, which have great financial capacity. It has already established credit facilities with auto makers to fund its auto inventory purchasing.
Zhongsheng's senior unsecured rating rating is not affected by subordination to claims at the operating company level. This is because, despite its status as a holding company with the majority of claims at the operating subsidiaries, creditors at Zhongsheng benefit from the group's highly diversified business profile with cash flow generation across a large number of operating subsidiaries, which mitigates structural subordination risk.
Zhongsheng's rating also takes into account the following environmental, social and governance (ESG) considerations.
Zhongsheng faces similar social and environmental risks related to the larger automotive ecosystem, because of consumer demand, global supply chain challenges, transportation of inventory and the use and protection of consumer data.
From a governance perspective, the founders, Mr Yi Huang and Mr Guo Qiang Li, together owned about 58% of the company's shares as of June 2020. This risk is mitigated by the presence of a material minority shareholder, Jardine Group, as well as the company's good track record since its listing in 2010.
The stable outlook on the rating reflects Moody's expectation that Zhongsheng will continue to grow its business while prudently managing its financial profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade Zhongsheng's rating if (1) its liquidity profile improves on a sustained basis, such that its unrestricted cash and free cash-flow generation can cover its short-term debt obligation; and (2) it maintains its leading market position and solid financial profile such that its debt-to-EBITDA ratio is maintained below 2.5x and its EBIT-to-interest ratio is sustained above 6x.
However, Moody's could downgrade Zhongsheng's rating if (1) its business profile weakens; (2) its liquidity deteriorates; (3) it adopts a more aggressive financial policy of debt-funded expansion; (4) Jardine Group reduces its shareholdings in Zhongsheng; or (5) Zhongsheng's financial profile weakens on a sustained basis such that debt/EBITDA rises above 3.0x-3.5x, RCF/net debt falls below 25% or EBIT/interest falls below 4x.
The principal methodology used in this rating was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Zhongsheng Group Holdings Limited is a leading auto dealer in China. It operated 360 stores across 24 provinces in China as of the end of 2019. Headquartered in Dalian, Zhongsheng was founded by Mr Yi Huang and Mr Guo Qiang Li, who are the controlling shareholders of the company. Jardine Strategic Holdings Limited is a strategic investor, owning about 20% of the company as of the end of 2019. Zhongsheng was listed on the Hong Kong Stock Exchange in March 2010.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Roy Zhang Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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