Investing.com -- S&P Global Ratings has revised the outlook for Shanghai Electric Holdings Group Co. Ltd. (SEHG) and its core subsidiary, Shanghai Electric Group Co. Ltd., from stable to positive. The ’BBB’ long-term issuer credit ratings for both entities have been affirmed. The improved outlook is based on the expectation of increased earnings and cash flow for SEHG, driven by strong industry fundamentals and the company’s continued financial discipline.
SEHG, one of China’s largest manufacturers of power equipment, is expected to benefit from a robust market position, solid new orders for key products, and improved working capital management. The positive rating outlook reflects the belief that SEHG’s improving profit and cash flow will likely help it to manage debt growth and deleverage over the next 12-24 months.
The revised outlook for SEHG and Shanghai Electric is due to increased visibility on a recovery in the companies’ margin and cash flow over the next 12-24 months. The companies are expected to benefit from strong downstream demand, a solid market position, and disciplined financial management.
Revenue for SEHG is expected to rise by a low single-digit percentage over the next two years, primarily due to growth in the thermal power equipment business. As the market leader of coal-fired power equipment in China, SEHG has benefited from the government’s push in coal-fired power capacity addition since 2022. Its annual new orders for such equipment more than doubled to over Chinese renminbi (RMB) 30 billion in 2023 and 2024, compared with the 2021 level. This is expected to fuel segment growth over the next two to three years.
The company’s power equipment segment, which offers higher profitability than other business segments, is expected to account for a higher proportion of revenue. This will offset the impact from intense competition and weaker margins in the elevator business.
SEHG’s EBITDA margin is estimated to have improved to 6.0%-6.5% in 2024, from 5.5% in 2023, and will stay at a similar level over the next one to two years. The company’s EBITDA is expected to expand to RMB9.0 billion–RMB9.5 billion during the period, from RMB7.8 billion in 2023. Similarly, Shanghai Electric’s EBITDA margin is forecasted to stay at 6.5%-7.0% in 2025-2026.
Improving working capital management and financial discipline are expected to help SEHG to deleverage. The company saw RMB8.0 billion–RMB 9.0 billion of net cash inflow from working capital movement in 2024 due to increasing advance payments from coal-fired power plants to accelerate product delivery and installation. This improved SEHG’s operating cash flow substantially and allowed it to pay down some of its debt in 2024, leading to a drop in the debt-to-EBITDA ratio to 4.5x-5.0x from 6.4x in 2023. The ratio is forecasted to further decline to 4.3-4.5x in 2025-2026.
SEHG has a very high likelihood of receiving extraordinary support from the Shanghai municipal government. The company continues to have very strong links with and serves a very important role for the Shanghai municipal government, given its substantial size and significance within the power industry supply chain. Shanghai’s local State-owned Asset Supervision and Administration Commission (SASAC) continues to inject equity into the group and make direct appointments of the company’s senior management, highlighting the strong ties.
Shanghai Electric remains a core subsidiary of SEHG. The rating on Shanghai Electric will move in tandem with that on SEHG. Shanghai Electric accounted for more than 70% of SEHG’s assets and revenue in the first half of 2024. Such contributions are expected to remain at a similar level over the next 24 months.
The positive outlook on SEHG and Shanghai Electric reflects the belief that the group is on track to improving its financial performance, thanks to healthy industry conditions and disciplined financial management. A solid order backlog for key products, improving working capital turnover, and steady capital spending should help SEHG to strengthen its credit profile over the next 12-24 months.
The outlook on SEHG and Shanghai Electric could be revised to stable if SEHG’s debt-to-EBITDA ratio deteriorates toward 5x for an extended period, likely due to significant working capital outflow or aggressive debt-funded acquisitions. The ratings on both companies may be raised if SEHG’s debt-to-EBITDA ratio falls below 4.5x on a sustained basis while the group maintains its margins.
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