Xinjiang Goldwind Science Technology Co. Ltd. Outlook Revised To Negative On Raised #BBB-# Rating Affirmed

Stocks and Financial Services Press Releases Thursday April 26, 2018 16:55
HONG KONG--26 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 26, 2018--S&P Global Ratings today revised the rating outlook on Xinjiang Goldwind Science & Technology Co. Ltd. (Goldwind) to negative from stable. At the same time, we affirmed our 'BBB-' long-term issuer credit rating on the company. Goldwind is a China-based wind turbine generator manufacturer and wind farm operator.

We revised the outlook mainly because Goldwind's debt leverage in 2017 was higher than we expected due to its accelerated investments in wind farms, water treatment, and finance leasing services. In addition, we believe execution risk will rise as the company transitions to a wind farm-focused company, which is based on anticipated EBITDA contribution.

Based on Goldwind's business transition, we have shifted our key credit measurement to a ratio of funds from operations (FFO) to debt from a ratio of debt to EBITDA; this is in line with our practice for utility companies. In 2017, the company's debt-funded investments led its debt leverage to rise to 4.2x at the end of 2017, meaningfully exceeding our expectation of 2.8x-3.1x. Correspondingly, the company's FFO-to-debt ratio lowered to 17% from 23% over the same period.

The company's credit measures would be boosted if Goldwind meets its equity-raising target of Chinese renminbi (RMB) 5 billion in the third quarter of 2018 for working capital and investment purposes. However, we could lower the issuer credit rating if the equity-raising is substantially below our expectation, thereby causing credit measures to remain weak.

We affirmed the rating on Goldwind because we believe the company will maintain its leading position in the wind turbine generator (WTG) business, given its good market share. We also factor in the company's already-sizable and growing investments in wind farms. As Goldwind increases its proportional revenue contribution from wind farms, overall volatility will likely decrease.

By 2018, we expect Goldwind to generate about 60% of its EBITDA from wind farms, up from 40% two years ago. However, execution risk will stay high over next 24 months due to the company's significant increase in investments and a reduction in government subsidies. These investments should cause Goldwind's key credit measures to be relatively weak over the same period.

Goldwind's domestic installed capacity for wind farms could double over the next two to three years, based on its projects on hand. The company reported 1.5 gigawatt (GW) of attributable capacity under construction in China at the end of 2017, about 4x the level 12 months earlier. Unexecuted attributable capacity reached 2.8 GW. Such accelerated pace of downstream expansion in China could expose Goldwind to delays and regulatory issues. This is on top of working capital needs, potential lower tariffs, and delays in subsidy distribution.

The company also actively expanded its investment overseas. Its newly added development and storage projects in overseas wind farms reached a record high of 1.2 GW by 2017, compared with 440 megawatt (MW) in 2016. We expect Goldwind to sell most of the wind farm projects overseas rather than operate them.

We believe the Chinese government's favorable policy on renewable energy will benefit larger and more diversified players like Goldwind. For example, the National Development and Reform Commission recently announced a new renewable energy-quota system to increase the consumption of non-fossil fuel sources of power, especially wind and solar. Such policies will likely push Goldwind and others to develop new wind farms. On the other hand, the government wants the market to play a larger role in the development of renewable energy and is gradually reducing its financial support.

In our opinion, Goldwind will maintain its leading market share in WTG manufacturing, based on its 29% share in 2017 and the favorable environment in China. We anticipate that the company could increase its sales in 2018 and 2019 as developers rush to install capacity to lock in more favorable feed-in-tariff. Pulling forward demand (the anticipation that demand will exceed supply within a specific period) is always a risk with renewable energy.

We estimate that Goldwind's debt leverage--as measured by a ratio of FFO to debt ratio--will be 20%-25% over next two years, versus 17% as of 2017. This assumes that Goldwind completes the equity-raising to provide some relief. Our view is mainly driven by capital expenditure on wind farm construction, acquisitions of wind farms and water treatment plants, and working capital usage for WTGs and other ancillary businesses. Long payment terms associated with subsidy repayment and expanded finance lease services could become a meaningful use of cash.

The negative outlook for the next two years is based on our expectation that Goldwind's debt leverage and execution risk will increase related to its business transformation over the same period. We estimate the company's FFO-to-debt ratio at 20%-25% after considering its proposed equity-financing in the third quarter of 2018.

We could lower the rating if Goldwind's FFO-to-debt ratio falls below 20%. This could be driven by a smaller equity-raising than we anticipate, aggressive debt-funded expansion, or working capital that is a much more meaningful user of cash.

We could also lower the rating should adverse regulatory changes in China weaken Goldwind's profitability and cash flow. This could happen if the company is involved in market-based power trading with lower tariffs than our forecasts; the government further delays the renewable subsidy payments; or the renewable energy quota program is poorly executed.

We could revise the outlook to stable if Goldwind executes its business transformation as planned and gradually returns its FFO to debt ratio close to 30%.

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