Bangkok--27 May--S&P Global Ratings
HONG KONG (S&P Global Ratings) May 26, 2020--S&P Global Ratings today took the rating actions listed above. We affirmed the ratings on Shanghai International Port (Group) Co. Ltd. (SIPG) because we expect the company's finances to withstand the blow from the COVID-19 pandemic and likely continued U.S.-China trade tensions. SIPG's financial headroom can absorb an expected significant decline of container throughput, and we anticipate the company will successfully renegotiate with stakeholders over the timing and financing of the Yangshan Phase IV transaction.
Strong cash flow from property sales over the next two years will help moderate the cash flow shortfall in 2020. SIPG will also maintain its inherent business strengths and is likely to fully integrate the commissioned Yangshan Phase IV terminal, the world's largest automated container terminal, over the next two years.
We expect the severely reduced global trade due to the COVID-19 pandemic to significantly slow the company's throughput and financial performance this year. In our new base case, SIPG's container throughput in 2020 will drop by 8%-10%, from 43.3 twenty-foot equivalent units (TEUs) in 2019. During the first four months, the drop was 8.4% compared with the same period in 2019. However, SIPG reported a mere 2.9% volume decline in April.
We view the April recovery in throughput as temporary and not an accurate reflection of the decline in container transport demand amid worldwide lockdowns and drastic global economic slowdown. We expect the company to face a sluggish second quarter and limited visibility of the timing and magnitude of rebound over the second half of 2020. Accordingly, its ratio of funds from operations (FFO) to debt will likely weaken to 25%-27% in 2020 from 36.4% in 2019, before improving to about 30% in 2021 based on an expected 5%-7% throughput rebound. In a stress scenario where the container throughput drop reaches 15% in 2020 and rebounds by 10%-12% in 2021, we see the ratio declining a further 1-2 percentage points.
By our estimates, the container business will account for at least 60% of SIPG's nonproperty total gross profit over 2020-2021. The company's diversified export and import structure and continuously improving operating efficiency should help it absorb the unprecedented pressure from the pandemic fallout. This is despite our assumption of a mild margin squeeze given the top-line decline. Cuts in port-related charges in the past two years have already undermined SIPG's profitability. We estimate average terminal handling charges per box may fall by 1%-2% from 2019 levels, compressing its overall EBITDA margin of port and port-related business by another 1-2 percentage points.
In our view, the likely prolonged trade tensions between the U.S. and China will remain another uncertainty hanging over SIPG's business rebound. In the Phase 1 trade agreement signed before the COVID-19 outbreak, China agreed to increase purchases of U.S. products and services by at least US$200 billion by 2022 and the U.S. will cut by half the tariff rate it imposed since September 2019 on US$120 billion worth of Chinese goods. U.S. tariffs of 25% on US$250 billion worth of Chinese goods put in place earlier will remain unchanged. These could be rolled back as part of a Phase 2 trade negotiation.
SIPG continues to maintain high operating efficiency, partly due to the commissioning of the Yangshan Phase IV terminal, the largest automated terminal in the world with capacity extendable to 6.3 million TEUs over time. We expect SIPG to fully integrate Yangshan IV over the next two years, both operationally and financially, lifting its capacity constraints and further improving efficiency.
The acquisition of Yangshan Phase IV from its current owner Shanghai Tongsheng Investment Group has been postponed and is unlikely to go through by 2020. Due to the COVID-19 pandemic and pressure from trade tensions, the Chinese renminbi (RMB) 14 billion acquisition transaction is likely to be primarily financed by equity, unlike the past financing for the acquisition of Yangshan Phase I to III terminals.
We expect SIPG to cautiously explore new investments in ports or port-related assets, including opportunities related to the initiative of integrating ports at the Yangtze River Delta and China's multicountry Belt and Road infrastructure initiative. In our view, the company will remain on the lookout for potential targets that can bring synergies and fit into its diversification strategy but manage its total spending in 2020, when it will pay no more than RMB3.7 billion to acquire a 5% stake in Ningbo Zhoushan Port Co. Ltd. (NZP). The discretion to sell investments that are publicly listed gives it the flexibility to adjust its capital structure if needed.
We still expect the upcoming windfall from property sales to help SIPG manage its leverage and moderate the negative impact of container shortfall. In our new base case, SIPG is likely to receive a total of about RMB20 billion in net operating cash flow from property sales in 2020-2022.
The stable outlook reflects our expectation that SIPG will be able to weather the COVID-19 pandemic and trade tensions. We also expect the company to withstand the negative impact from tariff cuts and resulting margin compression, and sustain its financial position over the next 24 months, benefiting from its strong port operations and significant cash flow from other investments, including property development. SIPG will maintain its market position, with an easing of capacity constraints following the commissioning of the Yangshan Phase IV terminal. We expect its FFO-to-debt to remain above 25% in 2020 and rebound to 30% in 2021.
We could lower the rating on SIPG due to its weakened stand-alone credit profile (SACP) if at least one of the following occurs:
The company's financial strength weakens materially because of a significant decline in cargo volume or port business profitability, or an increase in leverage to finance sizable new investments and acquisitions. FFO-to-debt below 23% on a sustained basis would indicate such a weakened credit profile; orSIPG further increases new investments outside its major business of operating ports, which could hurt both the business and financial profile of the company.
We would also lower the rating if the sovereign rating is downgraded.
Constrained by the sovereign rating, and given SIPG's predominantly domestic business, we could raise the rating on SIPG if the company materially improves its financial strength through deleveraging and/or significant growth of operating cash flow such that its FFO-to-debt increases to at least 40% on a sustained basis.