This review follows China Automation's announcement on 26 November of a profit warning for FY2012 (January to December).

RATINGS RATIONALE

"The review is driven by the weaker-than-expected performance of China Automation's railways business," says Alan Gao, a Moody's Vice President and Senior Analyst.

In its profit warning, the company forecast a year-on-year decline for its FY2012 annual results due to the suspension in orders for its core railway signaling systems.

Although China'sMinistry of Railway -- its main customer -- has announced a resumption in orders and an increase in railway project investments in 2H 2012, China Automation's announcement indicates that actual project executions, particularly in the signaling area, have been much slower than Moody's expectations.

Such developments raise questions over the company's ability to secure contracts and the sustainability of its business model. Such uncertainty could, Moody's considers, impact its financial position.

Moreover, China Automation has suffered a decline in orders from the oil refinery sector which is experiencing reduced sales.

"Additionally, the large amount of provisions on its trade receivables signals deteriorating earnings quality, and could pressure liquidity," adds Gao.

China Automation is required to treat accounts receivables of over two years as doubtful though they are related to projects from China Railway, China Railway Construction, the Ministry of Railways. Such doubtful accounts receivables have reached a significant level and consequently the company's liquidity position is tight.

At 30 June 2012, it had RMB548 million in cash on hand, not enough to cover short-term debt of RMB334 million and working capital requirements. The company is also likely to generate negative operating cash flows for FY2012.

In its review, Moody's will closely monitor (i) China Automation's operational performance, as measured by sales and contract wins, particularly in its core railway signaling business; (ii) its liquidity position and management of working capital; and (iii) any further impairment risk associated with its trade receivables and investments.

The principal methodology used in rating China Automation Group Limited was the Global Manufacturing Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

China Automation Group Limited specializes in providing safety & critical control systems for the petrochemicals industry and for railways signaling. It began its operations in 1999 and listed on the Main Board of the Stock Exchange of Hong Kong Limited on 12 July 2007. Its three founders, Mr. Xuan Rui Guo (Chairman & Executive Director), Mr. Kuang Jian Ping (CEO & Executive Director), and Mr. Huang Zhi Yong (Executive Director), collectively own 44.89%.

The Local Market analyst for this rating is Ping Luo, +86 (10) 6319-6561.

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