S&P Global Ratings has downgraded Zhongsheng Group Holdings' (HKG:0881) long-term issuer credit and issue ratings to BBB- from BBB, according to a recent release.

The auto dealer's margin profile faces constraints from changes in industry policy, while heightened price competition and weaker demand will hit profitability, S&P said.

The government's crackdown on "high-interest, high-rebate" car loan models in China's auto financing sector has led to a decline in commission income, the rating agency said.

The company also observes higher marketing expenses amid severe competition and reduced margins on new car sales.

Margins will be between 3% and 3.5% over the next two years, compared with a 6.7% average between 2019 and 2024, S&P said.

However, EBITDA recovery will come from bottoming-out losses in new car sales, better sales of higher-margin electric vehicles (TVs), and moderate expansion in after-sales business.

The outlook is stable, stemming from Fitch's belief of improving profitability over the next year amid reduced losses on new car sales through a better EV mix.

The rating agency expects debt-to-EBITDA ratio to fall to between 2x and 3x in the next 12 months due to greater EBITDA, better working capital management, and financial control.

S&P could downgrade the rating further if the company's debt-to-EBITDA ratio continues to exceed 3x.