OREANDA-NEWS. Fitch Ratings says that China-based car rental company CAR Inc.'s (CAR; BB+/Stable) ratings are not affected by its weaker-than-expected 2015 results and the recently announced share transfer agreements. Fitch expects that the slower revenue growth will be more than offset by slower new car additions, which will result in a better outlook for free cash flows (FCF).

CAR's 2015 earnings were slightly weaker than Fitch's forecasts and management's previous guidance. This was mainly due to a weaker fourth quarter as intense competition in the ride-sharing space reduced demand for short-distance car rentals. Utilisation rates in 4Q15 dropped to 60.1% compared with around 64% in 9M15 and 61.7% in 4Q14. Management now expects revenue in the short-term rentals business to rise 20% in 2016, compared with over 30% previously.

The company has also slowed its new-car additions due to the deceleration in demand growth, which has resulted in cash flow from operations being better than Fitch's expectations. Fitch expects this trend to continue, and it may allow FCF to turn positive in 2016, which may reduce CAR's financial leverage.

Fitch also expects the share transfer arrangements announced by CAR on 14 March 2016 to be neutral to CAR's credit profile. The arrangements will see UCAR Technology Inc., a ride-sharing company affiliated with CAR, becoming its major shareholder with a 29.21% stake.

Based on our discussions with management, Fitch does not expect CAR to raise its 9.35% stake in UCAR nor significantly expand the long-term fleet leased to UCAR, which reduces the risk of further cash outlay for UCAR over the next 12-18 months. Investments into UCAR of CNY1.2bn and new vehicle purchases of CNY5.0bn were the key reasons why CAR's FFO-adjusted net leverage rose to 2.7x at the end of 2015 from 0.9x a year earlier.