China Water Affairs Group's (HKG:0855) cancellation of a proposed spinoff could lead to fewer means of credit recovery and prompt less capital expenditures in the next two years, S&P Global Ratings said in a Thursday release.

The China-based water utility suspended its spinoff and listing plans for tap water subsidiary Silver Dragon Water Supply Group, due to changes in development strategies and the current market environment.

The company has seen its water supply segment's margin drop by 2 percentage points to 30% in fiscal year 2024, due to fewer tariff increases, S&P said.

The group's water connection revenue also fell 14% to HK$1.7 billion, given a decline in residential property completions.

The water utility's debt has increased as capital expenditures hit HK$5 billion, greater than the previous guidance of between HK$3 billion and HK$4 billion annually, after it took on some large water projects and entered the pipeline direct drinking water segment.

S&P does not expect the company to pursue the consolidation of its urban water treatment business, Kangda International Environmental, due to eroding financial leverage ratios.

The rating agency sees the company's credit profile gradually bouncing back in the next few years, but this will depend on increased water tariffs and disciplined capital investments.

Shares of the company rose 2% in recent trade.

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