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Yulon Motor Ratings Affirmed; Outlook Stable
Taiwan Ratings Corp. today affirmed its 'twA' long-term and 'twA-2' short-term corporate credit ratings on Yulon Motor Co. Ltd. (Yulon). The outlook on the long-term rating is stable. The ratings reflect Yulon's good profitability, strong balance sheet, and ample cash position. These strengths, however, are offset by a highly competitive and saturated market. Yulon, which promotes Nissan-branded cars in Taiwan, is the island's third largest auto manufacturer. It commanded a 14.8% share of of total domestic light vehicle sales in 2004, next to China Motor Corp. (18.8%) and Hotai Motor Corp. (Hotai; 28.3%).Taiwan's auto market is cyclical and mature. Total new light vehicle sales fell by 17% to 347,423 units in 2001, but grew to 406,580 units in 2003, and 474,318 units in 2004, mainly due to a recovering domestic economy, the introduction of new models, the increasing popularity of recreational vehicles (RV), and car-replacement demand. Taiwan Ratings expects total new light vehicle sales to grow slightly in 2005 in line with projected steady growth in Taiwan's economy Taiwan's auto market is very competitive. New light vehicle sales grew by 17% in 2004, mainly driven by a 39% annual growth in RVs. While Hotai, Mazda, and Honda enjoyed higher sales growth rates for new light vehicle in 2004, Yulon's growth was lower. As a result, Yulon's market share fell slightly in 2004. Despite good sales of its sport utility vehicle (SUV), especially its X-Trail model, Yulon faced strong competition in the sedan segment, particularly from Hotai's Toyota Camry and Altis models. In response, Yulon introduced its Teana model in October 2004 to strengthen its presence in the sedan segment. Nevertheless, Yulon's market share in the sedan segment still lags behind Hotai, although the gap is narrowing. Taiwan Ratings believes that Yulon may have to introduce a newer version of the Sentra model to improve its overall market share of the passenger vehicle market. In view of the saturated and highly competitive nature of Taiwan's auto market, the company established Aeolus Automobile Co. (Aeolus), a joint-venture with China-based DongFeng Motor Corp. (DongFeng), in 2000 to manufacturer passenger vehicles in mainland China. Yulon owns 40% of Aeolus and DongFeng owns the balance. The joint-venture posted solid sales and earnings results in 2002 and 2003 as a result of strong growth in mainland China's auto market, which in turn helped bolster Yulon's profits over the same period. Nissan Motor Co. Ltd. (Nissan, rated BBB+/Stable/A-2 by Standard & Poor's Ratings Services), is a long-term shareholder in Yulon with a 25% stake. It provides key components and model development to Yulon. On May 20, 2003, Yulon announced an organizational restructuring plan under which the company was divided into two separate entities. Yulon continues to engage in manufacturing activities, while a new joint venture--Yulon Nissan Motor Co. Ltd. (Yulon Nissan)--engages in non-manufacturing operations supporting the Nissan brand, ranging from engineering and purchasing to sales and marketing support. Nissan exchanged its 25% shareholding in Yulon for a 40% share in Yulon Nissan; Yulon controls the remaining 60%. Yulon Nissan will be a fully consolidated entity in both Nissan's and Yulon's financial statements. Yulon's joint-venture with DongFeng, its sales company, and other associated businesses will also be fully integrated into Yulon Nissan, which will support Nissan's development into the mainland China market. Yulon Nissan has been listed on the Taiwan Stock Exchange since December 2004. After Yulon's organizational restructuring, it changed its strategy to focus on manufacturing autos for new international brand names, to raise its capacity utilization rate, and improve its overall profitability. Yulon established a joint- venture with General Motors Corp. (GM) on December 15, 2004, to introduce its branded vehicles, including Cadillac, Buick, and Opel, to Taiwan. The joint-venture's initial capital base is NT$2 billion, Yulon will control 51% of the new joint venture and GM will own the remaining 49%. However, Taiwan Ratings considers the joint-venture is unlikely to contribute strong profits to Yulon over the next two years, given that the market share of GM's branded vehicles is limited in Taiwan since consumers prefer Japanese vehicle brands and models. Therefore, Yulon's major profit contribution will still continue to come from Nissan's models. Yulon has reported strong earnings from its auto manufacturing activities and its investment portfolio of more than 40 companies Yulon reported operating income of NT$1.6 billion and a pretax profit of NT$6.1 billion in 2004. Yulon projects a lower pretax profit of NT$5 billion in 2005. The company's financial projections tend to be on the conservative side, with actual results consistently outperforming projections in recent years. This reflects the company's conservative management style and is also one of the credit rating factors. In addition to good profitability, Yulon also has a strong balance sheet. Over the past four years, the company has consistently generated positive free operating cash flow sufficient to fund its cash dividend payouts. Moreover, the company has ample cash and zero debt. Liquidity. OUTLOOK: STABLE
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