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Coronavirus In China: Domestic Auto Industry, Car Rental Companies Likely To Feel Impact In First Quarter

The break out of coronavirus in Wuhan, one of the largest auto production bases in China, and the speed of the disease spreading all over the country, will affect the operational and financial stability of Chinese auto original equipment manufacturers (OEMs). According to the China Passenger Car Association, Hubei produced 2.2 million units of auto in 2019, ranking fourth among 31 provinces and municipalities in China and accounting for about 9% of the country's total production. Wuhan alone contributed approximately 70% of the province's auto output, based on S&P Global Ratings' estimate.

Although it is too early to predict the overall impact, China's auto production is likely to materially decline year on year in the first quarter. This is on the back of an early Chinese New Year (2019's Chinese New Year was in February) and extended production suspension due to the coronavirus outbreak.

Chinese auto OEMs suspended production for around two weeks in January 2020, consistent with previous Chinese New Year periods. Production resumption has now been delayed from early February to Feb. 10-14 for some provinces and cities, in accordance with the governments' latest directives to control contagion. By our estimate, these places collectively control about half of China's auto production capacity and the total volume loss could be 1%-2% of China's annual production. Moreover, production resumption may be delayed further, depending on the development of the epidemic. Production normalization will also take some time, with OEMs potentially arranging for employees to come back to work in batches so it is easier to monitor their health and limit further transmission of the virus. In Hubei's case, calling non-local workers back to work during this time may also be difficult, as migrant workers may not be willing to travel back to the disease outbreak center. As such, the real impact could be larger. However, given the low industry utilization rate, OEMs can speed up production in the second half to achieve their yearly output target, after the epidemic is under control.

First-Quarter Demand Could Be Hurt, But Consumption May Get Slight Boost Once Epidemic Is Under Control

In our view, auto sales will likely decline in the next one to two months. Auto dealers are delaying business resumption. At the same time, people are trying to avoid going to public places. On top of this, an early Chinese New Year in January 2020 brought forward some purchases into December 2019. However, we believe the worries about use of public transport and the sense of security from one's own vehicle may lead to sales recovery after the epidemic stabilizes. This was the case in 2003, the year of SARS outbreak, when China's passenger vehicle grew 75%.

However, we don't believe 2003 offers a good comparison. In our view, the positive effect on auto demand from coronavirus is likely to be mild. After two decades of rapid development, China's car ownership per 1000 people has grown to 186 units in 2019, up from only 19 units in 2003 (see chart 2). The wider availability of public transport, such as national high-speed railway and urban transit rail, and the growth of car hailing and rental companies also offer more mobility choices. Decelerating economic growth and high household leverage will also cap the magnitude of auto sales rebound. Our assumption for China's 2020 auto sales growth remains at 1%-2%, but downside risk could heighten if sales weaken significantly in the first half should the outbreak is not contained in a timely manner.

Chart 1

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Chart 2

image

Some Auto OEMs' Financials May Weaken, But Limited Rating Pressure As Of Now

Most of the Chinese auto OEMs we rate have a stable rating outlook. We expect them to continue to maintain their leading market position and stable alliance with global OEM partners. Their credit profiles also have buffer to tolerate a moderate decline in sales volume, given decent margins and low financial leverage.

Table 1

Our Ratings Outlooks On Auto OEMs Are Mainly Stable
Issuer Issuer credit rating Outlook

Beijing Automotive Group Co. Ltd.

BBB+ Negative

BAIC Motor Corp. Ltd.

BBB+ Negative

China FAW Group Co. Ltd.

A Stable

Dongfeng Motor Group Co. Ltd.

A Stable

Zhejiang Geely Holding Group Co. Ltd.

BBB- Stable

Geely Automobile Holdings Ltd.

BBB- Stable
Source: S&P Global Ratings.

Among them, only Dongfeng Motor Group Co. Ltd. (DFG) has material exposure to Hubei. The most significantly affected entity would be DFG's joint venture (JV) with Honda, which has over 600,000 units of production capacity in Wuhan. The JV accounted for 27% of DFG's sales volume in 2019 at a production utilization rate of 120%-130%. Given the production loss of two weeks or potentially more in February, the JV's market share may be eroded. The manufacturing plants of DFG's own proprietary brands and its joint venture with PSA Peugeot Citroën Group (PSA) and Renault are also located in Wuhan. We see less impact on these three entities, given their smaller volumes and already low utilization rate of 10%-40%. We estimate the temporary production suspension will not have a material impact on DFG's margin and financial metrics. Any prolonged production suspension will likely not only affect the company alone, but the whole industry and the supply chain.

Lower Auto Production Hurts Auto Suppliers' Demand

Hubei is also the base for hundreds of auto parts suppliers, a majority of which are small to midsized companies with fewer than 500 employees. Many of the companies primarily supply local auto producers with low-value added components, such as interior and exterior auto parts. Therefore, we don't see a risk of major disruption to the entire supply chain. Auto parts suppliers with operations in the rest of the country also face extended production suspension, and their production resumption date should generally match the schedule of their OEM customers.

The Chinese auto suppliers we rate generally have minimal or small exposure to Wuhan. In our view, higher credit risk would come from prolonged weak auto production. Smaller auto parts suppliers with a heavy reliance on migrant workers or weak liquidity condition might not survive.

Table 2

Rated Auto Suppliers Have Minimal Or Small Exposure To Wuhan
Issuer Issuer credit rating Outlook

Johnson Electric Holdings Ltd.

BBB Stable

Nexteer Automotive Group Ltd.

BBB- Stable

Pearl Holding III Ltd.

B- Negative

Yanfeng Global Automotive Interior Systems Co. Ltd.

BBB- Stable
Source: S&P Global Ratings.

Car Rental Industry Is Also Exposed To The Outbreak

The coronavirus outbreak during Lunar New Year will likely weigh on car rental companies' first-quarter results in 2020. Strong demand for car rental amid Lunar New Year travel season is traditionally one of the key EBIT and cash flow contributors to car rental companies, and the companies typically add vehicles in advance to capture this demand spike. However, travel restrictions and health fears caused total traffic in China (including rail, road, water, and air) to decline year-on-year since Jan. 23, 2020, and plummet by over 80% on the fifth day of the 2020 Spring Festival's Golden Week.

Until the outbreak is contained and travel fear abates, we believe car rental demand will likely continue to face pressure given consumers' reduced willingness for leisure travel, company efforts to curb non-essential business trips, compounded with travel restrictions imposed by local governments. On the other hand, car rental is perceived as a safer and more favorable type of transportation because of the minimal public exposure. This could serve as a mitigant. In addition, we believe car rental companies may re-evaluate their short-term growth strategy, reduce capital expenditure, and adjust their fleet deployment to offset the negative impact.

At this point, it's hard to quantify the exact impact, but we believe the event could stall credit metrics recovery and add to liquidity risk for our rated issuers--CAR Inc. (B+/Stable/--) and eHi Car Services Ltd. (B+/Stable/--). In an extreme case, a prolonged and severe reduction in demand and cash flow could lead us to take negative rating actions on these companies. eHi has limited cushion under its 1.1x EBIT interest coverage downgrade threshold coming into 2020. CAR Inc. has a cushion of about 0.4x under its 1.3x EBIT interest coverage downgrade threshold, but it faces significant debt maturities in the coming 12 months.

Related Research

  • Coronavirus In China: Early Thoughts On The Economic Impact, Jan. 23, 2020
  • Why China's Car Rental Industry Is Sputtering, Jan. 14, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Claire Yuan, Hong Kong (852) 2533-3542;
Claire.Yuan@spglobal.com
Stephen Chan, Hong Kong (852) 2532-8088;
stephen.chan@spglobal.com
Xin Hui Zu, CFA, Hong Kong (852) 2533 3589;
sara.zu@spglobal.com
Secondary Contact:Chloe Wang, Hong Kong + 852-25333548;
chloe.wang@spglobal.com
Additional Contact:Cher Chen, Hong Kong (852) 2533-3569;
cher.chen@spglobal.com

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