China’s announced cut in the handling tariff for import and export containers is credit negative for Shanghai International Port (Group) (SIPG), Moody’s rating agency said.
However, the cuts will not immediately affect SIPG’s A1 issuer rating or the A2 backed senior unsecured bond ratings of Shanghai Port Group (BVI) Holding. The ratings outlook remains stable.
“The reduction in tariff will negatively impact SIPG’s profitability and cash flow generation capability from 2018 onwards, and reduce the financial headroom for its standalone credit profile,” Osbert Tang, a Moody’s Vice President and Senior Analyst, and the Local Market Analyst for SIPG, said.
Moody’s estimates that, as a result of the tariff reduction, SIPG’s container handling revenue will fall by CNY 1 to CNY 1.5 billion in 2018, resulting in a lower gross profit margin of 52%-53% for this business segment during the same year when compared with the 57% achieved during the six months between January and June 2017.
Accordingly, Moody’s estimates that SIPG’s adjusted funds from operations (FFO)/debt and FFO interest coverage will soften to 20%-21% and 6.0x-6.5x, respectively, in 2018 from earlier projections of 22%-23% and 6.5x-7.0x.