Autos

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

A credit-rating cut by Moody's Investors Service has prompted equity and debt investors to take another close look at Chinese car rental business Car Inc. They should focus on its subsidiary-turned-parent, UCAR Inc.

Car Inc.'s downgrade to Ba2 from Ba1 certainly isn't good news for the Hong Kong-traded company, especially since a negative outlook was maintained. But at least ratings providers are shedding light on the firm.

UCAR Inc. is under no such spotlight, and that's even worse for Car Inc.'s investors because the listed company's fortunes are inextricably tied to those of its stablemate.

Breakdown
Car Inc.'s 2020 notes sank to the lowest since June after Moody's cut the company's senior unsecured debt ratings by one notch to Ba2 Monday
Source: Bloomberg

Take revenue. Last year almost 2 billion yuan ($289.6 million), or 40 percent, of Car Inc.'s rental sales came from its closely held parent, which operates a chauffeured car service and gets its vehicles mainly from the listed subsidiary. UCAR's Maimaiche e-commerce business also accounted for 49 percent of Car Inc.'s used vehicle sales.

Growing Reliance
Only 956 of the 19,499 vehicles in Car Inc.'s long-term fleet were not working for its parent, UCAR Technology
Source: Company filings

But what really needs exploration is the balance sheet. While UCAR is the parent of Car Inc. (having earlier been a subsidiary), the shareholdings run in both directions. Car Inc. booked a 996.2 million yuan increase in the value of its 7.42 percent stake in UCAR last year, a boost to non-operating income that was equivalent to 68 percent of net profit.

UCAR underwent a series of equity funding rounds over the past 18 months, prior to its July listing on the thinly traded National Equities Exchange and Quotations board, China's pink-sheets market. Its valuation of 42.7 billion yuan, though, comes from the latest round -- with investors including China UnionPay Co. and Shanghai Pudong Development Bank Co. -- which began at the end of last year and is expected to close as early as this quarter.

The problem is that the gain recorded by Car Inc., by virtue of this up round, doesn't reflect UCAR's operating performance: The business lost 3.6 billion yuan last year, according to the parent's annual report.

If such an equity raising can boost its valuation, then that also opens UCAR to the possibility of down rounds -- and Car Inc. to future fair-value losses.

Even if further share sales can be avoided, it's incumbent on Car Inc. itself to be proactive in reassessing UCAR's value. There's precedent for such actions in Asia with SoftBank Group Corp., Valic Co. and Fidelity Investments marking down their stakes in India's Flipkart.

Car Inc. said that "UCAR’s sustainable development has largely lifted its credit profile." Now that Moody's has downgraded Car Inc., it's time for UCAR to face similar scrutiny.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Car Inc. corrects value of UCAR in sixth paragraph.)

To contact the authors of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net