Moody’s: China’s Tariff Reduction Is Credit Negative for SIPG

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, unveiled by China’s National Development and Reform Commission (NDRC) earlier in November, 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.

On November 15, the NDRC revealed that the import and export handling tariff for non-transshipment containers at the Port of Shanghai will be lowered by 19.4% to CNY 480 per TEU, effective January 1, 2018.

The NDRC also ordered tariff cuts of between 11% and 21% at several other ports, including Tianjin, Ningbo-Zhoushan and Qingdao, that enjoyed dominant market positions in their respective servicing regions.

The tariff adjustment was prompted by the Chinese government’s antitrust review on the business operations of coastal ports, with the aim of reducing overall logistics costs and promoting a fairer operating environment for shipping companies. Other announced measures included a further opening of tugboat, tallying and shipping agency markets, and cancellation of unreasonable contract clauses.

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.

Such revised projections will reduce SIPG’s financial headroom against the downgrade triggers for its baseline credit assessment, namely, adjusted FFO/debt below 20% and/or FFO interest coverage below 6.0x on a sustained basis.

Shanghai International Port (Group), the dominant player in the Port of Shanghai, handled 29.9 million TEUs between January and September 2017.

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