OREANDA-NEWS. Fitch Ratings has affirmed China-based Shanghai Electric (Group) Corporation's (SEG) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign-currency senior unsecured rating at 'A'. The Outlook is Stable.

Fitch has also affirmed the Long-Term Foreign-Currency IDR of SEG's 55%-owned subsidiary, Shanghai Electric Group Company Limited's (SE), and SE's foreign-currency senior unsecured rating, at 'A'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Improved Standalone Profile: Fitch has upgraded SEG's standalone credit profile to 'A-' from 'BBB+', as the agency no longer deems SEG's group-level assets as an excessive financial burden to its consolidated credit profile following the disposal of legacy loss-making assets previously endowed by Shanghai municipal government as part of Shanghai's state-owned enterprise (SOE) reform. In addition, SEG's standalone credit profile is underpinned by SE's standalone credit profile of 'A-', driven by its leading market position in the Chinese power generating equipment market and large overall net cash position. The recent restructure between SEG and SE also saw key group assets integrated at the SE level.

Rating Uplift Lowered: SEG's two-notch uplift accorded for its linkage with its shareholder, the Shanghai municipal government, has been lowered to one notch to reflect its diminished role in SOE reforms following the disposal of the legacy assets. This leaves its final rating at 'A'. The one-notch uplift reflects the strategic role SEG plays in Shanghai's industrial sector. SE's final ratings are equalised with those of its parent, SEG, due to their strong operational and strategic linkages. SE accounted for more than 80% of SEG's consolidated revenue and 100% of its consolidated EBITDA in 2015.

Coal-Fired Power Equipment Weakening: Fitch expects orders for equipment used in coal-fired power plants to decline significantly as the Chinese government is curbing thermal power generation capacity in 2016. SE's total coal-fired power equipment sales were flat in 2015, while gross margins improved by 1.3pp to 23.3%, reflecting its focus on higher average selling price (ASP) orders and margin preservation. However, Fitch expects SE's large order backlog to support sales in the near term and its superior product lines to partially mitigate margin erosion. This is despite falling order inflows and escalated competition for new orders, which could weigh on ASPs.

Wind Power Equipment Burgeoning: Fitch expects wind power equipment to support SE's expansion in the near term, with demand rising rapidly due to the government's focus on increasing wind power generating capacity. SE is China's largest manufacturer of equipment for offshore wind power plants, with more than 60% market share. Off-shore wind power generators, which typically have higher ASPs, took up a greater share of the segment, helping SE expand wind power equipment sales by 44.6% and increase margins by 3.7pp in 2015.

Well-Positioned in Nuclear: China has reignited development of nuclear power stations and Fitch believes SE will benefit from increased nuclear power quota approvals from 2016. This is supported by SE's position as one of China's leading nuclear island power equipment manufacturers and the only domestic producer of Gen-3 nuclear island equipment.

Strong Liquidity: SEG has a large cash balance, totalling CNY39.8bn at end-2015, positive FCF generation and access to bank financing and external funding channels. The company's debt totals CNY25.2bn - including CNY12.8bn at the SE level. Group-level liquidity has improved over the years following the disposal of the legacy loss-making assets and monetisation of liquid investments. There are also unutilised land reserves at the group level, which can be monetised to preserve liquidity if needed.

Linkages with Parent: Fitch believes SEG is strategically important to the Shanghai municipal government due to its leading market position in power generation equipment manufacturing, a pillar industry in China's economy. SEG plays a strategic role in Shanghai's industrialisation and assists the central and Shanghai municipal government in acquiring leading electrical and mechanical technology through partnerships with global players and overseas investments.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for SEG include:

- Revenue flat or increasing up to 2% between 2016 and 2018. (2015: 1.6%)

- EBITDA margin remaining around 8% between 2016 and 2019. (2015: 8.5%)

- Consolidated capex of CNY3bn in 2016 and 2017

RATING SENSITIVITIES

Positive rating action is not probable unless there is a significant improvement in SEG's business profile - including greater product, end-market and geographical diversification - or a marked improvement in its standalone profile without a reduction of the group's linkages with the Shanghai municipal government.

Negative rating action may be taken if:

- SEG experiences a sustained deterioration in its market position, such as a consistent loss of market share in the group's core business or a sustained weakening in its order backlog

- SEG's FFO margin is sustained below 5.5% (2015: 6.8%)

- Fitch assesses the linkage with the Shanghai municipal government as weakening

FULL LIST OF RATING ACTIONS

Shanghai Electric (Group) Corporation

Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable

Foreign-currency senior unsecured rating affirmed at 'A'

Shanghai Electric Group Company Limited

Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable

Foreign-currency senior unsecured rating affirmed at 'A'

Shanghai Electric Group Global Investment Limited

USD500m 3.0% senior unsecured notes due 2019 guaranteed by Shanghai Electric (Group) Corporation affirmed at 'A'

Shanghai Electric Newage Company Limited

EUR600m 1.125% senior unsecured notes due 2020 guaranteed by Shanghai Electric Newage Company Limited affirmed at 'A'