Bangkok--30 Sep--Moody
Moody's Investors Service has today downgraded GITI Tire Ltd's ("GITI") corporate family rating to B3 from B2 and senior unsecured bond rating to Caa1 from B3. The ratings outlook is stable. This concludes the rating review initiated on September 15, 2009.
"The rating action was driven by Moody's concern that GITI's high financial leverage, which is weak for its previous rating, is unlikely to improve by any material extent amid the challenging global automotive market," says Wonnie Chu, a Moody's Analyst.
"While the company's operating performance in recent months is on an improving trend, it remains uncertain whether it can be sustained as most of the margin expansion was driven by lower raw material prices which have since risen again," says Chu, also Moody's Lead Analyst for the company.
In addition, demand from GITI's export markets remains weak and recent tariffs imposed by the US government on Passenger Car Radial ("PCR") imports could further pressure GITI's profitability. As such, the company's adjusted debt/ebitda (including notes payables), based on our estimates, is expected to remain high at around 6x over the next 1-2 years, assuming a moderate increase in raw material prices.
The rating action also reflects GITI's volatile operating performance. The company is exposed to commodity price movements given raw material costs account for approximately 70% of its total sales. The company's quarterly gross margin has historically been in the range of 10% and 20% on the back of volatile raw material prices and pricing pressure resulting from weak market demand.
Such volatile earnings, together with GITI's weak capital structure, with adjusted debt/cap in excess of 70% and heavy reliance on short-term debt, heighten the company's business and financial risks and position the company more appropriately at the low single B rating level.
The B3 rating also considers GITI's strong competitive position in China's growing market, and low-cost structure when compared with its global peers. In addition, its diversified product mix -- in FY2008 Truck & Bus Radial ("TBR") accounted for 50% of sales, PCR accounted for 40%, and Bias 10%, as well as its high proportion of sales for the replacement market (80% of total sales) and domestic market (65%) could serve as a stabilizing factor for its operating performance.
The stable outlook reflects Moody's expectations that GITI will continue to receive support from its relationship banks and roll over its short-term debt. It also reflects Moody's expectations that the company will have sufficient cushion on its balance sheet to withstand the current challenging global automotive market and will recover its profitability over the next few years.
The rating could face upward pressure if GITI 1) improves its capital structure by lengthening its debt maturing profile and/or reducing its total debt outstanding; and/or 2) prudently manages its operations and capex, such that adjusted debt/EBITDA falls below 4.5x on a sustained basis.
GITI's ratings could be downgraded if its 1) quarterly performance weakens further due to the prolonged industry downturn, such that debt/EBITDA exceeds 7-8x; 2) liquidity profile tightens as a result of difficulties rolling over its bank debt; and/or 3) evidence emerges of cash leakage/upstreaming to group companies and shareholders.
The principal methodology used in rating GITI was Moody's Global Automotive Supplier Industry, published in January 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
The last rating action with regard to GITI was taken on September 15, 2009, when its ratings were put on review for possible downgrade.
GITI Tire Pte Ltd ("GITI") is the largest motor vehicle tire manufacturer in China. It is a private company ultimately owned by the Liem family, which has a Singaporean-Indonesian background. GITI also has a minority interest in PT Gajah Tunggal TBK (Caa1/stable), an Indonesian tire producer.
Hong Kong
Wonnie Chu
Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077
Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077