OREANDA-NEWS. Fitch Ratings said that CAR Inc.'s (CAR: BB+/Stable) entry into the chauffeured car service market via a business collaboration with UCAR, an independent third-party service provider, is credit positive for CAR in the long term, but it has no significant impact in the short term.

Under the agreement, UCAR will rent cars from CAR on both long-term and short-term bases and be responsible of hiring drivers and other tasks. The chauffeured car service will be cobranded, allowing UCAR to leverage CAR's strong brand awareness, fleet size and geographic coverage to compete with other players.

Fitch sees huge market potential for the chauffeured car service industry in China, with growth driven by demand for premium and differentiated transportation from high-end customers. However, the healthy development of the industry is highly dependent on related regulations. On 9 January 2015, China's Ministry of Transport announced a nationwide policy on taxi-hailing apps that expressed support for the chauffeured car industry while banning apps like Uber, Didi and Kuaidi from using unlicensed private cars and drivers. This move encourages the use of rental cars, however, there is still a lot of regulatory uncertainty in the chauffeured car industry. Fitch believes CAR, as the leading car rental company in China, would play an important role in standardising and promoting industry best practices.

The collaboration with UCAR would also enhance CAR's financial profile. A long-term rental customer would help CAR reduce its cash inflow volatility and increase the long-term rental margin. At the same time, the short-term rental contract with UCAR would optimise CAR's fleet utilisation.

Fitch expects long-term rental to have contributed to less than 15% of CAR's total gross profit and its gross margin to have been 27% in 2014, which is much lower than that of short-term rental margins of above 40%. The bulk purchase and allotment of cars to UCAR rather than tailored contracts with individual long-term rental customers would give CAR more bargaining power when it buys vehicles from car manufacturers, which would expand the segment's margins. At the same time, CAR would optimise the utilisation of its short-term rental fleet by deploying idling vehicles to UCAR for short-term chauffeured service.