Fitch Ratings has affirmed Shenzhen Energy Group Co., Ltd.'s Long-Term Foreign-Currency Issuer Default Rating of 'A'.
The Outlook is Stable.
The rating is aligned with, but not equalised to, our internal assessment of Shenzhen municipality under our Government-Related Entities Rating Criteria. The rating reflects a strong likelihood of government support, underpinned by the company's strategic importance to local power security and energy development. Shenzhen Energy is the largest local power producer, with total installed power capacity of 17.5 gigawatts (GW) in 2022.
We have revised up Shenzhen Energy's Standalone Credit Profile (SCP) to 'bb', from 'bb-', as we expect EBITDA net leverage to remain below our previous rating case forecast of 8x-9x at around 7x-8x during 2023-2026. The company's EBITDA net leverage fell to 7.7x in 2022, against our expectation of 9.4x, on lower capex and strong EBITDA growth. We estimate 1H23 EBITDA net leverage was around 7.1x, driven by a recovery in the thermal power margin and strong profit growth from the non-power segment.
Key Rating Drivers
'Strong' State Linkage: We assess Shenzhen Energy's status, ownership and control by the government as 'Strong'. The company is 49% directly and indirectly owned by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC). The Shenzhen government has broad control over its strategies and operations and directly appoints its key management.
'Strong' Support Record: Shenzhen Energy obtains financing support from the government for key infrastructure projects through low-cost policy loans and special bonds and receives small annual subsidies. It also has exclusive rights to develop certain energy-related projects in Shenzhen. We expect government support for Shenzhen Energy to continue in light of the company's policy role as an important power supplier for Shenzhen.
'Strong' Socio-Political Implications of Default: The company owns 40.7% of Shenzhen's grid-managed installed power capacity, with power output that met 15% of the city's power demand in 2022. Shenzhen Energy has been tasked to construct 70% of new gas-fired power capacity under China's 14th Five-Year Plan through to 2025 and will also build new gas-fired power units at the Mawan Power Station to replace existing coal-fired units. These project will increase the company's market share of installed power capacity and supply.
Furthermore, Shenzhen Energy will lead the development of distributed solar projects under China's Five Year Plan. We expect the company to increase its direct imports of natural gas once the Zhoushan Liuheng liquefied natural gas (LNG) terminal, with annual designed capacity of 4 million tonnes, commences operation in 2026. It also provides 90% of the city's municipal waste collection and treatment.
'Very Strong' Financial Implications of Default: Shenzhen Energy is among the three largest Shenzhen SASAC-owned government related entities (GREs) with high policy intensity and one of the largest and most active domestic bond issuers. We believe its default would make funding difficult for many other Shenzhen state-owned entities.
Margin Recovery: We expect Shenzhen Energy's coal-fired power margin to increase in 2023 from declining coal prices, while the coal-fired power tariff remains stable. We expect a 10% drop in the average coal-fired power tariff in 2024, but the margin could still widen mildly as the coal price further declines. We also expect the gas-power margin to recover through to 2026 on lower gas prices. Higher contracted gas volume from national oil companies could allow Shenzhen Energy to purchase spot LNG through its stake in LNG terminals should the international LNG price becomes favourable.
Steady Renewable Energy Development: Shenzhen Energy's proportion of installed power capacity from renewable energy was 38% in 2022. It targets to increase this capacity to above 40% by 2025, mainly through wind and solar power projects. We expect the company to add 3.1GW of renewable energy capacity through to 2026 and forecast its on-grid power generation to rise at a CAGR of 9%.
SCP Revised to 'bb': The SCP is supported by Shenzhen Energy's strong funding capability, rising exposure to more stable renewable power and business diversification. We expect its EBITDA net leverage to improve to 7.5x in 2023, from 7.7x in 2022, driven by the margin recovery and capacity growth in the power segment. Capex is likely to rise in the next two years from the construction of gas-power infrastructure projects, but leverage should be supported by decent EBITDA growth.
Derivation Summary
Shenzhen Energy's rating is aligned to, but not equalised with, Fitch's internal assessment of the municipality's creditworthiness. Its four key rating factors are the same as those for Shenzhen Investment Holdings Co., Ltd. (SIH, A+/Stable), except for status, ownership, control, which we assess at 'Very Strong' for SIH, as it is wholly owned by and is the largest state-owned entity under Shenzhen SASAC.
Key Assumptions
Total power capacity to reach 22.4GW by 2026, with the renewable energy and gas capacity mix exceeding 80% by 2026, from 62% in 2022
Coal-fired power utilisation hours to remain high in 2023, as power supply and demand remains tight, then gradually declining from 2024 to 2026
Coal-fired power margin to increase in 2023 on lower average coal prices and slightly rise in 2024-2026
City gas sales volume to increase at a CAGR of 4% over 2022-2026
Unit gas gross profit to rise above CNY0.24/m3 in 2023-2026 on the normalisation of gas prices and better cost pass-through
Annual capex to rise to around CNY13 billion-17 billion during 2023-2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on Fitch's internal credit assessment of Shenzhen municipality, provided the likelihood of support from the municipality remains intact
Higher likelihood of support from Shenzhen municipality
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on Fitch's internal assessment of Shenzhen municipality
Weakening likelihood of support from Shenzhen municipality
Liquidity and Debt Structure
Adequate Liquidity: Shenzhen Energy's total debt was CNY85.3 billion at end-September 2023. This included perpetual bonds and short-term debt of CNY17.7 billion. The company has total available cash of CNY17.1 billion, including inter-bank deposits, as well as strong financing channels with ample bank facilities from the major domestic banks.
Issuer Profile
Shenzhen Energy is the largest local power producer in Shenzhen, with total installed power capacity of 17.5GW in 2022.
Summary of Financial Adjustments
Fitch adjusted CNY18 billion in perpetual bonds as debt, as the bonds contain a look-back provision.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Shenzhen Energy's Long-Term IDR is linked to Fitch's internal assessment of the credit profile of Shenzhen municipality.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
SHENZHEN ENERGY GROUP CO., LTD. 
