OREANDA-NEWS. Fitch Ratings, Hong Kong/Shanghai/Singapore, 04 February 2015: Fitch Ratings has assigned a final rating of 'BB+' to the USD500m 6.125% senior unsecured notes due 2020 issued by CAR Inc. (CAR). This final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 4 January 2015.

The notes are rated at the same level as CAR's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

CAR's ratings are supported by its dominant market share in the car rental market in China, significant flexibility to scale down capex during downturns and strong financial profile with low net leverage. The ratings are constrained by its short track record in used car sales and regulatory uncertainty in the car rental industry, which is in its early stages of development in China.

KEY RATING DRIVERS
Market Leader, Strong Profile: CAR is the No.1 car rental company in China with 31% share of the short-term self-drive market as at end-2013. Consulting company Roland Berger expects the Chinese car rental industry to grow at more than 20% a year into 2018, with existing players having the advantage of high entry barriers due to capital intensity, funding needs and restrictions on vehicle license plates by governments in certain provinces. CAR has significant first-mover advantage over its peers; a large fleet size that is four times that of the second-largest player; more than 100 vehicle models to meet different rental needs; a wide geographic spread covering 70 major cities; a lower cost structure than its competitors; a dynamic pricing system; and a strong distribution channel to dispose of its used cars.

Operational and Financial Flexibility: CAR has no minimum purchase commitments with car manufacturers. It also reduces its long-term lease commitments by increasing the number of pick-up points - parking facilities with simple service stands - instead of full storefronts. All the car parks have flexible lease termination arrangements. This business model gives CAR full flexibility to adjust operations during downturns. In addition, it has the choice to postpone fleet renewal by adding fewer new cars or disposing more used cars during downturns.

Solid Financial Profile: CAR has sound credit metrics. Its consolidated EBITDA margin is higher than its peers at around 40% (if excluding used car sales segment, the rental segment margin is estimated to be as high as 50%). Fitch expects this high margin is sustainable and CAR can further expand margins through better deployment of its car fleet, increasing economies of scale, and reductions in overhead costs. Fitch estimates its FFO adjusted net leverage to be 0.1x as of end-2014. Although CAR is expanding rapidly, Fitch expects its FFO adjusted net leverage to remain under 1.0x over 2015-2017 due to its prudent financial policy and flexible capex requirements.

Short Track Record in Used Car Sales: CAR started operations in September 2007 and listed on the Hong Kong stock exchange in September 2014. It only started meaningful sales of used cars in 2013. CAR's financial stability is dependent on estimates of the residual value of its used cars and whether CAR will be able to sell its used cars at reasonable prices in a downturn. CAR has yet to achieve a steady state in fleet renewal and demonstrate disciplined growth after raising high levels of offshore equity and debt.

Regulatory Uncertainty: The car rental industry in China is subject to the laws and regulations of various local governments. One of CAR's key competitive advantages over peers is its stock of car license plates in restricted and potentially restricted cities to secure future development. However, any unexpected change in regulations could adversely impact CAR's operations. Although these risks are not imminent, the car rental industry is at an early stage of development in China and there are likely to be regulatory changes before the industry matures and stabilises.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:

- FFO adjusted net leverage sustained above 1.0x
- EBITDA margin sustained below 40%
- EBIT margin sustained below 15%
- Loss of dominant market share in the car rental industry
- Evidence of greater regulatory or legal intervention leading to an adverse change in the company's operation and business profile

Positive: Future developments that may, individually or collectively, lead to positive rating actions include:

- A more mature regulatory environment in the car rental business
- Longer track record of sustained fleet renewal cycle
- Maintenance of strong financial profile during the growth