OREANDA-NEWS. July 06, 2015. 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 'A' rating of the USD500m 3.0% senior unsecured notes due 2019 issued by its wholly owned subsidiary, Shanghai Electric Group Global Investment Limited. The notes are unconditionally and irrevocably guaranteed by SEG.

SEG's rating is based on Fitch's assessment of its standalone credit profile at 'BBB+', weaker than that of its 55%-owned core subsidiary Shanghai Electric Group Company Limited (SE; A/Stable), due mainly to higher debt at the group level. The ratings for both SEG and SE benefit from their moderate-to-strong linkages with the Shanghai Municipal Government, while SEG's rating has a two-notch uplift compared with a one-notch uplift for SE. This is due to SEG's legacy role in the reform of state-owned entities (SOEs) in the last decade in Shanghai, as well as its involvement in strategic, high-tech investments under the direction of - and with funding support from - the Shanghai Municipal Government.

KEY RATING DRIVERS

Improved Group-Level Performance: The EBITDA deficit from SEG's group-level assets narrowed significantly in 2014 due to disposal of some legacy loss-making assets and better-than-expected performance from other group businesses. Net debt at the group level fell by CNY1.7bn due to asset disposals and the sale of liquid investments. Fitch expects a rising EBITDA contribution from group-level assets and further improved net debt position at the group level due to ongoing legacy asset disposals and investment portfolio liquidation.

Healthy Liquidity: SEG has a large cash balance, positive FCF generation and access to bank financing and external funding channels. It had CNY30.3bn in readily available cash as of end-2014, and CNY20.5bn in debt - including CNY25.1bn and CNY7.8bn at the SE level, respectively. Group-level liquidity has improved over the past year due to deposing of 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 Shanghai Municipal Government: SEG serves as a conduit to channel potential support for SE, a leading maker of power-generation equipment, from the Shanghai Municipal Government. SEG also receives direct government support due to its policy role in SOE reform and in government-directed strategic, high-tech investments, which Fitch views as distinct from the group's core operations run by SE. SEG has not relied on SE's cash flow to support its group-level policy-oriented activities, but has instead received direct funding support from the Shanghai Municipal Government in the form of zero-cost asset transfers and equity injections.

KEY ASSUMPTIONS

- Consolidated EBITDA margin to remain at around 8%
- Capex = 3.5% of revenue, trending downwards from the highs in 2010-2012 as major capacity expansion plans are completed - including the construction of new plants
- No major acquisitions.

RATING SENSITIVITIES

Positive rating action is unlikely unless there is a significant improvement in SEG's business profile - including greater product, end-market and geographical diversification - or a marked improvement in the standalone financial profile without simultaneously reducing 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.
- FFO margin is sustained below 5.5%
- Linkage with Shanghai Municipal Government is assessed to be weakening.