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Rating Action:

Moody's assigns first-time A2 ratings to Shanghai Electric (Group) Corporation

 The document has been translated in other languages

01 Aug 2014

Hong Kong, August 01, 2014 -- Moody's Investors Service has assigned a first-time A2 issuer rating to Shanghai Electric (Group) Corporation (SEGC).

At the same time, Moody's has assigned an A2 rating to the proposed bonds to be issued by Shanghai Electric Group Global Investment Limited -- an indirectly wholly owned subsidiary of SEGC-- based on the unconditional and irrevocable guarantee by SEGC.

The ratings outlook is stable.

The proceeds from the proposed issuance will be used to fund SEGC's offshore acquisitions, and for general corporate uses.

RATINGS RATIONALE

SEGC's A2 issuer rating incorporates the group's baseline credit assessment (BCA) of a3 and a one-notch uplift for the support from the Shanghai municipal government under Moody's joint default analysis approach for government related issuers.

"SEGC's BCA mainly reflects the strong credit profile of Shanghai Electric Group Company Limited (SHE, A2 stable), its 58%-owned subsidiary, and representing about 80% of the group's revenues and assets," says Jiming Zou, a Moody's Assistant Vice President and Analyst.

SHE owns the most profitable, cash-generative assets of SEGC. It has a long operating track record, and large domestic market share in the power equipment and elevator business, where there are high entry barriers.

Moreover, SHE has a solid financial profile, as evidenced by its positive free cash flows, sustained net cash position, and low level of interest-bearing debt. Please refer to Moody's press release on SHE for further details.

Apart from SHE, SEGC has other businesses -- such as manufacturing air-conditioning compressors, fasteners, bearings, automation systems, and textile machinery, etc -- which account for about 16% of the group's revenues and exhibit weak business fundamentals in aggregate. While each of SEGC's business segments has demonstrated varied operating performances, the group's overall operating margin has been stable at around 4%-5% over the last three years.

SEGC's consolidated financial profile is solid, as evidenced by its positive free cash flows, sustained net cash position and moderate level of interest-bearing debt, largely driven by SHE. Its adjusted debt/EBITDA has ranged from 2.7x-3.3x in the last three years (2011-13).

While Moody's expects the acquisition of a 40% stake in Ansaldo Energia (unrated) for EUR400 million in May, as well as other business investments, will increase SEGC's gross debt, such impact is mitigated by SEGC's substantial land reserves (12.5 million square meters in land-use rights) in Shanghai, and its long-term financial investments (market value of RMB9.1 billion at end-2013), which can be monetized for future debt servicing.

Moody's does not notch down SEGC's BCA for structural subordination risk, despite its holding company status, because subsidiary debt only accounted for about 7% of its total assets at end-2013. Moody's expects this trend to continue in the next few years.

On the other hand, SEGC's A2 rating incorporates a one notch uplift, based on its 100% ownership by and strategic importance to the Shanghai municipal government.

The Shanghai municipal government regards the group as a national leader in the equipment manufacturing industry, and has offered favorable conditions for the group to grow its business operations, which are mainly based in Shanghai.

SEGC received subsidies totaling RMB938 million in 2013 and RMB633 million in 2012 from the Shanghai municipal government and other government-related bodies for research activities, new projects development, and for streamlining its business operations.

Moody's expects that the Shanghai municipal government will provide extraordinary support to SEGC in times of financial distress, given the group's important role in supplying equipment to the domestic power sector, and the associated reputation risk for the government.

The rating outlook is stable, reflecting Moody's expectation that SEGC will maintain its market leadership and a net cash position, the latter of which will provide a financial cushion against business downturns.

Moody's will consider upgrading SEGC's rating if the group: (1) further strengthens its technology, product offerings and business scale as against global competitors; (2) improves its EBITA margin to above 10%; and (3) maintains a prudent financial profile, with FFO/debt exceeding 50%, free cash flow generation, and a sustained net cash position.

On the other hand, SEGC's rating could face downgrade pressure if: (1) the group's profits deteriorate, with its EBITA margin falling below 4%-5%; (2) its order backlog falls substantially below 2.0x of its revenue; or (3) there is a material deterioration in its financial profile such as negative free cash flow, a shift towards a net debt position, and if FFO/debt is below 25%.

Indications of weaker support for the group from the Shanghai municipal government could also result in a downgrade.

The principal methodology used in this rating was the Global Manufacturing Companies published in July 2014. Other methodologies used include the Government-Related Issuers methodology published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Shanghai Electric (Group) Corporation manufactures thermal, nuclear and wind power equipment, power transmission and distribution equipment, elevators, air compressors, automation systems, printing machines, and machine tools. It is one of the three major power equipment suppliers in China. In 2013, it recorded RMB94.7 billion (USD15 billion) in sales, of which RMB79 billion came from its 58%-owned subsidiary— Shanghai Electric Group Company Limited (A2 stable). It is 100% owned by the State-owned Assets Supervision & Administration Commission, under the Shanghai municipal government.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Jiming Zou
Asst Vice President - Analyst
Corporate Finance Group
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

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

Moody's assigns first-time A2 ratings to Shanghai Electric (Group) Corporation
No Related Data.
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