OREANDA-NEWS. S&P Global Ratings said today that it had assigned its 'BBB-' long-term corporate credit rating to Xinjiang Goldwind Science & Technology Co. Ltd. The outlook is stable. At the same time, we assigned our 'cnA-' long-term Greater China regional scale rating to the company. Goldwind is a China-based wind turbine generator manufacturer.

"The ratings reflect Goldwind's strong market position in China's large wind turbine generator market, its competitive products, larger production scale with integrated supply chain, favorable government policy toward renewable energy, and its first-mover advantage," said S&P Global Ratings credit analyst Stanley Chan. "The company also has an intermediate level of debt leverage. These strengths are partly offset by high business volatility and intense price competition in a market where product and technology differentiation remains limited and demand is volatile. We expect continued significant volatility in the company's profitability because of regulatory uncertainties and its high product and market concentration."

In our view, the government's policy on renewable energy will remain generally supportive to the wind power sector. We believe that government subsidies will remain the major driver for wind power investments in the coming three to four years. Wind power investments will still rely on government subsidies to be financially viable.

However, the pace of subsidy reductions and local governments' execution on the renewable energy policy could have a knock on effect on Goldwind's wind turbine manufacturing business. As a result, there could be large swings in demand for wind turbine generator for any unexpected change in the government's subsidy policy. In particular, the Chinese government's new wind power tariff reduction until 2020, which was announced in late 2015, could keep new installations strong in 2016-2017. But new installations could drop significantly after 2018 if the improvement in wind power efficiency fails to offset the tariff reductions.

We believe that Goldwind will be able to strengthen its market position both domestically and internationally over the next one to two years based on its competitive products and better service capability. We expect the company to slightly grow its market share in China's wind turbine generator market over the next one to two years from about 25% in 2015 with a widening gap with its local competitors because of its improving product mix towards wind turbine of higher capacity and stronger service capability.

We expect the company to be able to maintain its competitive cost structure because of its larger production scale, more flexible outsourcing strategy and stronger R&D, partly based on enormous operating data from its much larger installation base that those of local peers. The company's ability to provide a full range of services from wind farm evaluation, wind turbine supply, engineering and contracting, and wind farm operation and services also differentiate it from local competitors.

We also believe that Goldwind will continue to face intense competition in China's wind turbine generator market because of its limited product and technology differentiation. We recognize that the company's direct drive permanent magnet (DDPM) wind turbine generators are more efficient than competing products of traditional architecture, particularly at low wind speed with lower maintenance costs. However, we believe that the technology barriers for its international and domestic competitors to develop similar or comparable products are limited. This is despite our view that it will take time particularly for local competitors to catch up.

Goldwind's business concentration in wind turbine generators and geographical concentration in China could aggravate the company's business volatility, in our view. The company generated about 80% of its EBITDA from the manufacturing of wind turbine generator in 2015 and the percentage is likely to remain above 60% over the next two to three years despite the company's large investments in its own wind farms. We also believe that the company's new businesses such as waste water treatment are unlikely to materially change its business portfolio over the next two to three years. In addition, the company will still generate more than over 80% of its wind turbine generator manufacturing revenue from China over the next two to three years, despite our expectation of faster growth in the company's international sales based on the company's competitive cost structure and improving track record in the international market.

In addition, we expect growing wind power generation revenue to moderately enhance Goldwind's EBITDA margin and slightly reduce the company's volatility of profitability over the next two years. We expect wind power to contribute 30%-40% of Goldwind's EBITDA over 2016-2017, up from about 20% in 2015, with aggressive investments. Wind power revenue, which is based on fixed tariffs set by the government, is recurring and more stable than wind turbine manufacturing revenue. This is despite the fact that weather conditions and grid connection priority could cause volatility in wind farms' utilization hours. Goldwind has experienced high wind curtailment for its wind farms in north and northwest China over the past few quarters because of weak power demand, together with insufficient transmission capacity.

However, we believe that the Chinese government's long-term and short-term strategy, including the construction of new transmission lines and imposing minimum utilization hours for wind farms in the most affected areas, will lower the risk. The company's new projects that are mostly located in southern and eastern China will also lower overall wind curtailment over the next one to two years. Based on those factors, we have assessed Goldwind's business risk profile as fair.

We anticipate that high capital expenditure on own wind farms will cause negative free operating cash flow and mildly increase Goldwind's ratio of debt to EBITDA from 2.2x in 2015 over the next one to two years. However, the company should be able to keep the ratio below 3x over the next two years because of its stronger profitability. In addition, we do not expect the negative free operating cash flow to persist in the long term, because we anticipate that the company can reduce investments in own wind farms after 2017 and instead invest in wind farms mostly through a renewable energy fund in which the company will be a minority investor.

Goldwind's asset-light strategy by which the company outsources the manufacturing of most wind turbine parts should also limit capital spending and working capital needs for the company's wind turbine generator manufacturing business. Our base case also assumes that the company will maintain a moderate dividend distribution policy and will be flexible to reduce cash dividends to manage its debt leverage through business cycles. Based on those factors, we have assessed Goldwind's financial risk profile as intermediate.

We acknowledge that Goldwind's strong position in China's wind turbine market could increase, the Chinese government's policy on wind power has become more supportive, and wind power's reliance on government subsidies will decrease over time. In addition, growing wind power revenue should lead to a more stable profitability for Goldwind, in our view. This suggests a likely positive evolution in Goldwind's business risk profile toward lower business volatility. Based on those factors, we believe that Goldwind's credit profile is stronger than those of other rated companies with similar business and financial risk profiles. Our assessment of the comparative rating analysis is, therefore positive for Goldwind and its 'bbb-' stand-alone credit profile is one notch higher than the 'bb+' anchor.

"The stable outlook reflects our view that strong demand in China and Goldwind's good market position and the Chinese government's supportive policy on wind power will enable the company to sustain its revenue and profits from wind turbine manufacturing over the next one to two years," said Mr. Chan. This together with growing EBITDA from wind power generation will enable Goldwind to keep its ratio of debt to EBITDA below 3x over the next one to two years, despite high capital expenditure on its own wind farm. The stable outlook also reflects our expectation that the company's capital expenditure on its own wind farms will decrease significantly after 2017 once the company sets up a renewable energy fund by end-2016.

We may lower the ratings if Goldwind's competitive position weakens substantially because the company fails to maintain its position particularly in China with a declining market share, or the wind turbine market experiences unexpected regulatory changes that cause a substantial deterioration in the company's performance. The rating would come under pressure if profitability substantially weakens, such that its EBITDA margin drops materially below 11%, and remains highly volatile. We may also lower the rating if the company's ratio of debt to EBITDA stays above 3x for an extended period of time. The likely scenarios for such deterioration include: (1) Goldwind's profitability or working capital management weaken materially; or (2) the company's debt-funded investments are more aggressive than we expect.

An upgrade is less likely over the next 12 months because of the company's continued market and business concentration and high capital expenditures on wind power generation over the next one to two years. However, we may raise the ratings if Goldwind can lower its debt leverage to below 2x on a sustainable basis. This could be achieved if the company substantially and gradually reduces its wind farm investments. We may also raise the ratings if Goldwind can substantially strengthen its competitive position with stronger market share globally and more business and geographical diversity. Less-volatile and stronger profitability and successful overseas sales expansion with an EBITDA margin close to 18% may indicate such improvement.