OREANDA-NEWS. Shanghai Construction Group Co., Ltd.'s (SCGC, BBB/Stable) financial profile remains strong despite the weak construction market in China, thanks to its strong cash position and improved profitability, Fitch Ratings says.

The construction industry remained subdued in 2015, with nationwide fixed-asset investment growing only 10%, compared with 15% in 2014. SCGC was not immune to the market conditions, with new contracts from its core construction business rising only 0.1%, much slower than the 14% increase a year earlier.

The company's EBITDA margin improved slightly to 4.2% in 2015 from 3.9% in 2014 due to better cost efficiency and despite slower revenue growth of 9% in the weaker market. In 2016, we expect the company's revenue growth to slow to 8% with EBITDA margin remaining around 4%, supported by a still-robust backlog, which covers 2.5x of its 2015 revenue.

SCGC has been in a net cash position in the past five years due to its negative working capital and conservative expansion. In 2015, its net cash position increased to CNY12bn from CNY8bn a year earlier due mainly to working capital inflow. This strong liquidity, which provides a cushion in the down cycle, is a key credit strength.

The company will face challenges in 2016 and beyond as it continues to increase its infrastructure investment projects to make up for the slowdown in the conventional construction business. This move would require higher capital commitment to fund the projects. In addition, the contracts from these projects typically have fixed pricing, which means SCGC needs to manage the projects more tightly to avoid cost overrun risks. Traditional construction contracts tend to have a cost-plus pricing model, which allows cost increases to be passed to customers. Infrastructure investment is still only a small part of SCGC's business, accounting for 5% of its new contract and 1% of its revenue in 2015.