OREANDA-NEWS. Fitch Ratings has assigned China-based car rental company CAR Inc.'s (CAR, BB+/Stable) proposed US dollar senior unsecured notes a 'BB+(EXP)' expected rating.

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. The final rating of the proposed notes is contingent upon receipt of documents conforming to information already received. The company plans to use the proceeds of the notes for capex and other general corporate purposes, including refinancing.

KEY RATING DRIVERS
Rapid Expansion Increases Leverage: Fitch expects CAR's FFO adjusted net leverage to increase to 2.8x by end-2015 from 0.9x at end-2014 due to a faster-than-expected fleet expansion. This expansion is driven by growing demand for short-term rentals and CAR's cooperation with UCAR, a chauffeured car service provider in which CAR owns a 10% stake. The risk posed by the higher leverage during this period of rapid growth is mitigated by the improved profitability that stems from better economies of scale. Fitch estimates CAR would quadruple its EBITDA to USD1bn by end-2017; with EBITDA margin improving to above 50% in the next 24 months from 45.4% in 2014.

Enhanced Business Profile: Fitch sees strong market potential for the chauffeured car service industry in China, with growth driven by demand for premium and differentiated transportation services from high-end customers. CAR expects to generate up to 40% of its EBITDA from long-term rentals, which provide more predictable income, by end-2016 through its collaboration with UCAR. Furthermore, CAR will deploy its idle vehicles to UCAR for use in short-term chauffeured services. The tie-up will provide CAR with strong synergies because the company will be able to optimise use of its short-term rental cars during weekdays, which will enhance profitability.

Increased Regulation Supports Development: Fitch believes a regulated chauffeured car service market is potentially negative for taxi-hailing apps such as Didi and Uber. These apps are major competitors to UCAR, which has been operating within China's legal framework since it started formal operations in January 2015. Fitch also believes CAR, as the leading car rental company in China, would continue to play an important role in standardising and promoting best practices for the industry. According to Caijing business news website, China's Ministry of Transport is planning to issue new rules to regulate the chauffeured car service market in July 2015 at the earliest. The rules could reshape the use of mobile-enabled chauffeured services, and regulate the use of unlicensed private cars and drivers and promotions that offer services at below operating cost by chauffeured car services.

Operational and Financial Flexibility: CAR has no minimum purchase commitments with car manufacturers. In addition, it has the choice to postpone fleet renewal by adding fewer new cars or disposing more used cars during downturns. Operationally, it has reduced its long-term store rental expenses 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. These factors give CAR full flexibility to adjust operations during downturns.

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-2014. 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, high funding needs and restrictions on vehicle license plates by the Chinese government. CAR has significant first-mover advantage over its peers: it has a 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.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Rental fleet size to expand at 37% compounded annual growth rate till 2018 to satisfy continued growth in market demand;
- Average daily rental rate to be stable at CNY270 per day;
- Utilisation rate to gradually increase to above 66% by 2017;
- Short-term rental cars depreciated over 2.5 years and long-term rental cars over three years.

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

- FFO adjusted net leverage exceeds 3.0x during the high growth stage
- EBITDA margin sustained below 45%
- EBIT margin sustained below 20% (FY14: 25.2%)
- 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 phase.

Contact:

Primary Analyst
Vicki Shen
Associate Director
+852 2263 9918
Fitch (Hong Kong) Limited
28th Floor, Two Lippo Centre
89 Queensway, Hong Kong

Secondary Analyst
Ying Wang
Senior Director
+86 21 5097 3010

Committee Chairperson
Kalai Pillay
Senior Director
+65 6796 7221

Date of Relevant Rating Committee: 6 July 2015

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

Additional Disclosures
Solicitation Status
Endorsement Policy
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Endorsement Policy - Fitch's approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosures page. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.