Hong Kong, June 02, 2020 -- Moody's Investors Service has downgraded to A3 from A2 the issuer
ratings of Shanghai Electric (Group) Corporation (SEGC) and its key subsidiary,
Shanghai Electric Group Company Limited (SHE).
At the same time, Moody's has downgraded to A3 from A2 the ratings
of the senior unsecured bonds issued by Shanghai Electric Group Global
Investment Ltd and guaranteed by SEGC.
The outlook on all ratings has been changed to stable from negative.
RATINGS RATIONALE
"The downgrade of SEGC and SHE reflects our expectation that both
companies' leverage will remain elevated over the next one to two
years, mainly driven by ongoing acquisitions to transform their
businesses," says Gerwin Ho, a Moody's Vice President
and Senior Credit Officer.
Their increasing leverage has also resulted in a downgrade of SEGC's
Baseline Credit Assessment (BCA) by two notches to baa3 and a weakening
in the standalone credit profile of SHE, which are partly offset
by a three-notch uplift for likely government and parental support,
resulting in their A3 issuer ratings.
SEGC's leverage -- as measured by adjusted debt/EBITDA -
increased to 7.2x in 2019 from 5.4x in 2018, as SEGC
undertook several acquisitions to diversify away from its thermal power
equipment business as China transitions to a lower carbon economy.
Moody's expects SEGC's leverage to remain elevated at 7x-8x
over the next one to two years as it continues to engage in acquisitions,
but the EBITDA growth from its newly acquired businesses, such as
construction engineering for power plants and seamless steel pipe production,
will be slow due to high competition and business integration risks.
While SEGC has plans to lower its leverage, its deleveraging through
asset monetization will face market and execution uncertainties amid a
slowing economy.
The three-notch support uplift reflects Moody's assessment of a
high likelihood of support from and a high level of dependence on the
Shanghai Municipal Government and ultimately the Government of China in
times of need, underpinned by SEGC's high strategic importance to
China. SEGC is one of the top three power equipment manufacturers
in the country, and among only a few nuclear power equipment manufacturers
in China. The company has also taken on some key national mandates,
such as the research and development of heavy-duty gas turbines
for the power sector. In addition, the company supports the
country's "One Belt, One Road" initiatives by exporting power equipment
and overseas engineering services.
SEGC is also 100% owned by the Shanghai Municipal Government,
and any default by SEGC would raise reputational and contagion risk to
the city. As such, Moody's believes the central government
would support the efforts of the Shanghai Municipal Government to prevent
SEGC from defaulting to avoid disruption to the domestic financial markets.
The high dependence level reflects the fact that SEGC and the central
government are exposed to common political and economic event risks.
SEGC's BCA of baa3 reflects (1) its market leadership in the manufacturing
of energy and industrial equipment, (2) diversified product portfolio
that mitigates cyclicality in each individual segment, and (3) excellent
liquidity and considerable assets for monetization.
But the company's BCA is constrained by (1) its rising debt driven by
acquisition and high investments; (2) high market competition constraining
its EBITDA growth; and (3) the increasing execution risks stemming
from its growing new businesses and expansion into overseas markets.
The three-notch support uplift for SHE reflects Moody's assessment
that the company will receive high support from the Shanghai Municipal
Government in times of need, through the company's parent,
SEGC.
SHE is the largest subsidiary of SEGC and accounted for 90%,
95% and 88% of SEGC's revenues, EBITDA and total
assets respectively at the end of 2019. As a result, Moody's
considers the credit profile of SHE as closely linked to that of SEGC.
Both SEGC and SHE have excellent liquidity positions. Their cash/short-term
debt ratios were above 1x, and because the two companies are state-owned
enterprises of the Shanghai Municipal Government, they have good
access to banks and domestic bond markets.
In terms of environmental, social and governance (ESG) risks,
SEGC and SHE have indirect exposure to carbon-emitting industries,
such as the thermal power utility sector. However, both companies
are gradually reducing their reliance on the sale of thermal power equipment
and increasing sales of renewable energy products and other services.
With respect to corporate governance, SEGC is wholly owned,
supervised, and monitored by the Shanghai Municipal Government.
In addition, its flagship subsidiary, SHE is a listed company
on the Shanghai and Hong Kong Stock Exchange and provides good disclosure
of its businesses and financial position.
The outlook on the ratings is stable, reflecting Moody's expectation
that over the next 12 to 18 months, both companies' business
and financial profiles will remain stable, and their importance
to the Shanghai Municipal Government and ultimately the central government
will remain intact.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the ratings if SEGC (1) demonstrates a prudent
financial management and reduces its adjusted debt/EBITDA to below 5.0-5.5x
on a sustained basis; (2) retains current competitive strengths and
establishes a track record in all new businesses, and (3) maintains
an excellent liquidity position.
Moody's could downgrade the ratings if SEGC (1) aggressively pursues
debt-funded expansions such that its adjusted debt/EBITDA trending
above 7.5-8.0x on a sustained basis; (2) fails
to maintain current competitive strength in product offerings or to successfully
integrate the new businesses; or (3) the company's liquidity
position markedly weakens.
Any evidence of weakening government support to SEGC could also pressure
the ratings.
The ratings of SHE could be upgraded if Moody's upgrades the rating
of SEGC. Likewise, the ratings of SHE could be downgraded
if Moody's downgrades the rating of SEGC. And lastly a weakening
of support to SHE from SEGC could also pressure its ratings.
The principal methodologies used in rating Shanghai Electric (Group) Corporation
and Shanghai Electric Group Global Investment Ltd were Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
The principal methodology used in rating Shanghai Electric Group Company
Limited was Manufacturing Methodology published in March 2020 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
Shanghai Electric (Group) Corporation is a comprehensive equipment manufacturer
with business scopes covering the production of energy and industrial
equipment, and integrated services. The company is one of
the three major power equipment suppliers in China.
In 2019, it recorded RMB141 billion in sales, of which,
RMB127 billion came from its 59.18%-owned subsidiary,
Shanghai Electric Group Company Limited (A3 stable).
Shanghai Electric (Group) Corporation is 100% owned by the State-owned
Assets Supervision and Administration Commission, under the Shanghai
Municipal Government.
The local market analyst for these ratings is Sue Su, +86 (106)
319-6505.
REGULATORY DISCLOSURES
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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Gary Lau
MD - Corporate Finance
Corporate Finance Group
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