The rating outlook is stable.

This is the first time that Moody's has assigned a rating to CSR ZELC.

RATINGS RATIONALE

CSR ZELC's Baa3 rating reflects its strong and defensible market positions in domestic electric locomotives and mass transit vehicles. These markets have high entry barriers. The company has a more than 50% market share in domestic electric locomotives and around one third market share in domestic mass transit vehicles.

Such strong market positions reflect China's favorable and protective policies for the railway industry, as well as CSR ZELC's leading scale, integrated manufacturing and R&D platforms and its affiliation with its parent, CSR Corporation Limited (unrated).

The expected support from its parent, which has a strong credit profile, has resulted in a one-notch uplift from its standalone Ba1 rating.

"CSR ZELC's incumbent market position and its role as a key supplier for China'sMinistry of Railways (MoR), its major client, bode well to capture the continued demand growth from investments in national railways and urban transit systems in the next few years according to the 12th five-year plan of the central government," says Jiming Zou, a Moody's analyst.

"We expect spending on railways as well as municipal rapid transit systems to accelerate after a temporary slowdown during 2H 2011 and 1H 2012, as indicated by the newly approved projects and fresh capital available for the MoR," says Zou, who is also lead analyst for CSR ZELC.

CSR ZELC's rating is also supported by its sound financial profile with little gross debt and a net cash position over the last two years. The company has funded its business expansions through internal cash generation and equity injections from its parent, CSR Corporation.

Its interest-bearing borrowings amounted to RMB131 million as of June 2012, and which are insignificant when compared to its RMB14 billion in sales and RMB450 million in EBITDA as of 2011. While the company may need to leverage up moderately to fund its business growth, its projected financial profile will remain strong for its rating level.

However, CSR ZELC's rating is constrained by its high level of concentration risk in terms of its customer and geographic exposures. It derives more than half of its sales from the MoR. Almost 90% of its sales are to domestic customers. The company's main production facility is in Zhuzhou.

The company's reliance on the MoR renders it vulnerable to the domestic railway industry's investment cycles and increases its business volatility, as evidenced by its recent swings in revenues and receivables, which in turn are largely driven by the orders and funding availability of the MoR.

In addition, CSR ZELC faces the challenges of developing and delivering a large amount of new rolling stock products within a relatively short timeframe, and ensuring that high quality and safety standards are met.

The company has a low profit margin compared to international peers because of its high expenses related to the continuing development of new products and platforms. This leaves little headroom for surges in raw material prices, cost overruns or extraordinary warranty charges.

CSR ZELC's large trade receivables position reflects the long payment terms of the MoR. However, we expect the credit risk to be low, given the quasi-sovereign status of the MoR. In addition, the company has been able to pass on the majority of such working capital requirements to its suppliers without adding a burden to its own balance sheet.

Furthermore, the Baa3 rating takes into consideration the benefits that CSR ZELC obtains from being 100%-owned by CSR Corporation, which is in turn a listed subsidiary of CSR Group, and is ultimately controlled and supervised by the State-owned Assets Supervision & Administration Commission under the State Council.

As it is one of the key subsidiaries of CSR Corporation, CSR ZELC's business strategy, financing and investment plans are directed and supervised by the parent. We also expect continued funding support by CSR Corporation for CSR ZELC's growth plan without any material adverse change in the latter's financial profile.

The strategic importance of CSR ZELC's manufacturing base and development platforms, and its significant contribution to CSR Corporation, imply a high level of parental support in case of any financial distress , resulting in a one-notch rating uplift.

The rating outlook is stable, as we expect that the operating environment for the company will remain benign in the next two-three years given continued capital spending in the domestic rolling stock market. We also expect CSR ZELC will remain a key subsidiary of CSR Corporation in the near to medium term.

The rating could be upgraded if the company is able to (1) increase its business scale and improve business stability through greater geographic and customer coverage; (2) maintain its current healthy financial profile with improved profit margins; and (3) generate positive free cash flow on a sustainable basis.

The rating could be downgraded, if the company experiences (1) a significant loss of market share in its electric locomotive and mass transit vehicles segments; or (2) a material drop in its profitability; or (3) a deterioration in its credit metrics, as indicated by debt/EBITDA above 3.0x or EBIT/interest expense below 3.0x.

Any evidence of the diminishing business importance of CSR ZELC to its parent CSR Corporation or a deterioration in support from its parent could also result in a rating downgrade.

The principal methodology used in rating CSR Zhuzhou Electric Locomotive Co., Ltd was the Global Heavy Manufacturing Industry Rating Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CSR Zhuzhou Electric Locomotive Co., Ltd, founded in 1936, is the largest electric locomotive manufacturer in China with a strong operating track record, including the development of China's first electric locomotive in 1958. The company develops, manufactures and sells electric locomotives, mass transit vehicles and other rolling stock related products. It had RMB14 billion in sales as of 2011.

CSR ZELC is 100%-owned by CSR Corporation, which is a listed subsidiary of CSR Group. CSR Group is a central government-owned entity controlled by China's State-owned Assets Supervision & Administration Commission. As of 2011, CSR ZELC accounted for about 18% and 14% of CSR Corporation's consolidated sales and total assets.

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Jiming Zou Analyst Corporate Finance Group Moody'sInvestors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Gary Lau MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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