Shanghai Electric's profits inched up by 4.2% to RM16.7b

Thanks to robust contributions from new energy equipment arm.

Shanghai Electric (SHE) delivered solid 2015 results -- despite softening investments by customers in coal-fired power projects -- showing slight increases in revenues and earnings, as well as positive free cash flow and a net debt position.

Jiming Zou, a Moody's Vice President and Senior Analyst, said that SHE's revenues rose by 1.6% to RMB78 billion and gross profits rose by 4.2% to RMB16.7 billion in 2015, thanks to the increasing financial contribution from its new energy equipment business.

Specifically, revenues from this business, driven by wind and nuclear power equipment, grew by 23.7% and accounted for about 14% of total revenues in 2015, versus 11% a year ago.

Elevators, accounting for one fourth of SHE's revenues, showed revenue growth of 1.8% and a solid gross margin of 22.5%, despite the slowing property sector.

The growing number of installed elevators provided the company with recurring revenues in relation to maintenance and repair services. These revenues will grow and as a proportion of total revenues will exceed the current 23% level from the elevator business.

However, Moody's expects more a challenging operating environment in the next 12-18 months. The demand for the conventional coal-fired power equipment, which accounted for one third of SHE's revenues, has waned amid a slowing economy and stricter environmental regulations.

Price competition will also intensify in the traditional power equipment segment which will in turn pressure SHE's overall revenues and earnings.

This development is already evident in SHE's weakened level of earnings for 2H 2015 versus 1H 2015. In addition, the company could experience longer collection periods for receivables and greater financing needs in order to win new orders.

SHE's adjusted debt/EBITDA grew to 2.0x in 2015 from 1.2x in 2014, because debt increased to RMB14.4 billion from RMB8 billion at end-2014.

The increase occurred after the company raised RMB6 billion in a convertible bond issuance and EUR600 million in another bond issuance to fund overseas projects and capital injections into its captive leasing company.

However, the debt rise was mitigated by SHE's increased and substantial cash balance. Its cash balance of RMB40.2 billion, up from RMB30 billion at end-2014, was more than twice its gross debt of RMB14.4 billion at end-2015.

This large cash balance reflects the receipt of advance payments and deposits from customers for power equipment and elevator orders. Moody's expects its solid balance sheet to remain largely intact over the next 12-18 months.

Moody's further expects management to remain prudent when bidding for overseas projects or expanding its captive leasing business. The company's ample financial reserves will help it weather an adverse market environment and provide a cushion for its announced acquisition of a minimum 29.9% equity stake in a German equipment supplier, Manz AG (unrated), which had a market capitalization of about EUR182 million at end-March 2016.