(The following statement was released by the rating agency) HONG KONG/SHANGHAI, May 25 (Fitch) Fitch Ratings has affirmed Beijing Automotive Group Co Ltd's (BAIC Group) Long-Term Issuer-Default Rating (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the company's senior unsecured rating and the ratings of bonds issued by BAIC Inalfa HK Investment Co., Limited and guaranteed by BAIC Group at 'BBB+'. BAIC Group's rating incorporates a three-notch uplift from its standalone credit profile of 'BB+', reflecting moderate operational and strategic linkages with the Beijing Municipal Government. BAIC Group, which is 100% indirectly owned by the Beijing State-owned Assets Supervision and Administration Commission (Beijing SASAC), is the municipal government's sole vehicle for executing its development plan for the auto industry, the local economy's pillar industry. BAIC Group is Beijing's largest tax-payer and employs over 100,000 people, the majority being local residents. The Stable Outlook reflects Fitch's expectation that BAIC Group will maintain its leverage within our guideline. KEY RATING DRIVERS Financial Profile Constrains Rating: Fitch assesses BAIC Group's financial profile based on proportionate consolidation of the financial statements of the company's two joint ventures with Hyundai Motor Company (BBB+/Stable) and Daimler AG (A-/Stable). Its financial profile is supported by the joint ventures' solid profitability and consistent net cash positions, but these are offset by the proprietary operation's weaker financial profile. BAIC Group's proportionately consolidated EBIT margin rose to 4.0% in 2016 from 3.5% in 2015, and FFO-adjusted-net-leverage declined to 2.5x (2015: 3.3x). The company's financial profile is a key constraint on the rating. Benefit From Strong Benz Performance: Beijing Benz Automotive Co., Ltd.'s (Beijing Benz) sales volume increased by 27% in 2016 and it overtook Brilliance BMW to be the second-largest luxury car original equipment manufacturer (OEM) in China. Beijing Benz's gross margin expanded to 29.7% in 2016 from 25.2% in 2015. It now accounts for over 50% of BAIC Group's EBITDA. We expect Beijing Benz's market share to further expand, resulting in increasing revenue and rising margin. Beijing Benz has also started paying dividends to BAIC Group, diversifying the holding company's dividend sources. Strong Beijing Benz performance supports BAIC Group's credit profile. Increasing Net Debt: BAIC Group's deleveraging has been delayed by an increase in net debt to finance capex and other investments. The company had capex of CNY24 billion and spent CNY13 billion on other investments in 2016, which were not entirely met by a CNY25 billion equity injection and CNY9.1 billion from operating cash flow. Its net debt increased to CNY38.5 billion at end-2016 from CNY33.0bn a year earlier. We expect its net debt to continue to increase through to 2019. Decelerating Auto Sales Growth: Fitch expects China's auto-sales growth to decelerate to mid-single digits until 2020. Meanwhile the automaker's production capacity is still growing rapidly. Intensifying competition would weigh on margins in the industry. This can already be seen in the commercial vehicle and sedan sub-segments. SUVs are the only segment with strong demand growth, but margins in this segment are also likely to narrow as more manufacturers launch competing SUV models. Fitch expects BAIC Group to face more competition and margin pressure in the medium term. Major Auto Manufacturer: BAIC Group is China's fifth-largest auto manufacturer, with 10% of the market by sales volume in 2016. Passenger vehicles accounted for about 80% of BAIC Group's sales volume in 2016, while commercial vehicles made up the rest. BAIC Group has a well-diversified passenger vehicle portfolio, which includes large, mid-sized, compact and small sedans, SUVs and MPVs, to meet customer demand from the mass and premium market segments. Moderate Government Support: The Beijing Municipal Government provides BAIC Group with moderate policy and financial support, such as coordinating with regulatory authorities to establish the joint ventures with Hyundai Motor Company and Daimler AG and providing large capital injections and financial subsidies. The municipal government also purchases about half of BAIC Group's electric vehicles for use as taxis and government cars. Joint Ventures Lower Risk: Beijing Hyundai and Beijing Benz contribute close to half of BAIC Group's sales volume and are the group's core profit makers. The joint ventures manufacture the foreign partners' existing vehicle models and use their well-established brand names. The joint ventures incur limited research and development costs, bear relatively low product development and branding risk, and comply with more stringent overseas safety and environmental standards. DERIVATION SUMMARY BAIC Group's rating is based on a standalone rating of 'BB+' plus a three-notch uplift that reflects BAIC Group's moderate operational and strategic linkages with the Beijing Municipal Government. BAIC's multiple-JV structure and diversified brand and product portfolio lead to lower business risks than 'BB' category global peers, even though its scale is small and it lacks geographical diversification. BAIC's rating is mainly constrained by its relatively weak financial profile, in particular high leverage and negative cash flow contribution of its proprietary-brand operation. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Capex not exceeding CNY20 billion a year from 2017 to 2019 based on proportionate consolidation of the Beijing Hyundai and Beijing Benz financials - Beijing Benz and Beijing Hyundai to maintain existing dividend payout ratios - Beijing Benz's sales and operating margins to improve from 2017 to 2019 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Significant improvement in the group's competitive market position, including a sustained increase in the market share of Beijing Hyundai and Beijing Benz, as well as growing scale and profitability of the proprietary brand operation - FFO-adjusted net leverage sustained below 2.0x, based on proportionate consolidation of Beijing Hyundai and Beijing Benz Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Sustained deterioration of the business profile, including material adverse regulatory developments, or sustained gross losses in the proprietary brand operation - FFO-adjusted net leverage sustained above 3.0x, based on proportionate consolidation of Beijing Hyundai and Beijing Benz LIQUIDITY BAIC Group had CNY41 billion of cash and equivalents and unused banking facilities of CNY130 billion at end-2016. Total debt was CNY79 billion, including CNY43 billion of short-term debt. Contact: Primary Analyst Roy Zhang Associate Director +852 2263 9979 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Stella Wang Associate Director +86 21 5097 3026 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Proportionately consolidated financial statement is used to assess BAIC Group's financial profile. 51% of Beijing Benz's financial profile and 50% of BJ Hyundai's are consolidated into BAIC Group's adjusted financial statements. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: [email protected]. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) https://www.fitchratings.com/site/re/895493 Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) https://www.fitchratings.com/site/re/886557 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/1024207 Solicitation Status https://www.fitchratings.com/site/pr/1024207#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001