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Moody's: China Automation's 2015 profit warning is credit negative.

Hong Kong: Moody's Investors Service says China Automation Group Limited's profit warning is credit negative, but has no immediate impact on the company's B1 corporate family and senior unsecured bond ratings.

The ratings outlook remains stable.

On 1 March, China Automation announced that it expects a consolidated net loss of RMB32.7 million to RMB182.7 million in 2015, compared with a consolidated net profit of RMB46.7 million in 2014.

"China Automation's loss was mainly caused by non-recurring and non-cash items, including the allowance for bad and doubtful debt and impairment losses against its goodwill and intangible assets, although these items had minimal impact on its adjusted EBITDA," says Chenyi Lu, a Moody's Vice President and Senior Analyst.

The loss is largely driven by: (1) an increase in the allowance for bad and doubtful debt against account receivables aged over two years; (2) impairment losses against the goodwill and intangible assets related to its businesses in traction system and industrial railway signaling; (3) losses from the early redemption of the company's guaranteed notes; and (4) exchange losses from the depreciation of the RMB.

The loss is partially offset by the gain from the disposal of its 76.7% equity interest in Beijing Jiaoda Microunion Technology Company Limited (unrated), its railway signaling business, in June 2015.

The amounts written off as uncollectible account receivables were relatively small as the company recovered the allowance amounts for bad and doubtful debt. The company wrote off RMB1.3 million in 2014, RMB1.6 million in 2013 an RMB0.05 million in 2012, while its allowances for bad and doubtful debt were RMB68.1 million in 2014, RMB59.7 million in 2013, and RMB71.8 million in 2012. It recovered RMB33.0 million in 2014, RMB29.2 million in 2013, and RMB8.2 million in 2012.

Moody's expects China Automation's adjusted debt/EBITDA will remain around 4.0x-4.5x over the next 12-18 months, driven by: (1) expected revenue of RMB1.5 billion from its continuing operations in 2015 and flat revenue growth in 2016, underpinned by lower exploration and production spending by its customers amid lower global oil prices; and (2) an expected adjusted EBITDA margin of 13.5%, driven by cost controls, including headcount reductions.

This level of leverage is in line with the parameters of its B1 rating category. Despite the negative impact from weak global oil prices, some headroom remains within the company's rating before it breaches the downgrade trigger of adjusted debt/EBITDA exceeding 5.0x-5.5x on a sustained basis.

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Ratings Methodologies page on for a copy of this methodology.

China Automation Group Limited specializes in providing safety systems and control valves to the petrochemical industry and traction systems to the railway industry in China.

The company began operations in 1999 and was listed on the Main Board of the Stock Exchange of Hong Kong Limited in July 2007. Its three founders collectively owned 44.62% of the company at 30 June 2015.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Mar 23, 2016
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