Hanwha Total Petrochemical Co. Ltd. Assigned #BBB# Rating With Stable Outlook

Stocks and Financial Services Press Releases Thursday August 3, 2017 09:38
HONG KONG--3 Aug--S&P Global Ratings

HONG KONG (S&P Global Ratings) Aug. 3, 2017--S&P Global Ratings today assigned its 'BBB' long-term corporate credit rating to Hanwha Total Petrochemical Co. Ltd. (HTC), a Korea-based petrochemical company. The outlook is stable. HTC is a 50/50 joint venture between Hanwha General Chemical Co. Ltd. and Total S.A., through its 100% affiliate Total Holdings UK Ltd.

Our rating reflects our expectation that HTC's creditworthiness will remain solid, despite some weakening in its operating performance and leverage. We expect the company's debt-to-EBITDA ratio to stay below 1.5x over the next 12-24 months. The company's credit metrics improved materially in recent years due to strong operating cash flows in a favorable market environment and low capital expenditure (capex) following a major investment cycle in 2012-2014 to expand its aromatics capacity. From this strong base, we expect some weakening in the operating performance and also aggressive dividend payments.

In our view, the petrochemical industry in Asia has reached its peak-cycle profitability and is likely to moderate gradually, mainly due to supply growth in the region on capacity additions. Still, HTC's balanced product portfolio between the olefins and aromatics value chain, its economies of scale from its large complex and feedstock flexibility, and its high operating efficiency should help temper the pressure. Overall, we expect the company's EBITDA to decline 20%-30% in 2018 from the peak level in 2016-2017, but sustain profits higher than the previous downturn level.

We expect HTC to modestly increase capex in 2017-2019 to expand its olefins value chain capacity. At the same time, the company's dividend payment is likely to remain high, broadly in line with that in 2016, given the company's aggressive dividend policy resumed after the investment cycle. In addition, HTC's operating cash flows are likely to decline. As a result, we expect the company's debt to increase gradually from 2018.

HTC's smaller scale than global peers, commoditized product mix, and geographically concentrated asset base in Korea constrain its business risk profile. Moreover, we believe the company's cash flows are vulnerable to the inherent volatility in its major business, like peers in the petrochemical industry. The company's operating performance is also vulnerable to fluctuations in macroeconomic factors such as raw material prices and fluctuations in exchange rates.

We consider HTC as a moderately strategic subsidiary of Total, given HTC's importance to Total's overall market strategy as a large and highly efficient petrochemical asset with proximity to China. HTC is one of the key strategic petrochemical assets globally for Total, having superior operating efficiency and sound profitability. We believe Total is likely to provide financial support to HTC in the event of financial distress. As a result, we apply a one-notch uplift on the ratings on the company from its stand-alone credit profile.

Our base-case assumptions are:
Asia Pacific's real GDP to increase by 5.6% in 2017 and 5.3% in 2018.China's real GDP to increase by 6.7% in 2017 and 6.3% in 2018. Korea's real GDP to rise 2.8% in 2017 and 2.7% in 2018.

Brent prices to average US$50/bbl in 2017 and 2018.Demand in petrochemical sectors to grow modestly due to stable prices despite moderating regional GDP growth. The regional demand and supply balance should vary across chemical products.

HTC's Revenue to increase 1%-5% in 2017 and 2018, mostly due to higher average selling prices in 2017 and volume growth in 2018.EBITDA in 2017 to remain similar to that in 2016, given a strong operating performance in the first half of this year. EBITDA to then decrease by 20%-30% in 2018 from the peak level in 2016-2017 due to moderating margins on its major products such as styrene monomer, para xylene, and polymers.

Capex to modestly increase to Korean won (KRW) 450 billion-KRW600 billion in 2017 and 2018, from KRW270 billion in 2016, for capacity expansion in 2017-2019. Dividend payments of KRW550 billion-KRW750 billion in 2017 and 2018 on a high dividend payout ratio, broadly in line with KRW630 billion in 2016.

Based on these assumptions, we arrive at the following credit measures: Debt-to-EBITDA ratio of 0.7x-1.2x in 2017 and 2018 compared with 0.8x in 2016.We assess HTC's liquidity as adequate.
We expect the company's ratio of liquidity sources to uses to be slightly over 1.2x over the next 12 months, and to remain positive even if EBITDA declines by 15%, under a stress case.
As a key petrochemical producer in Korea, HTC has a satisfactory standing in credit markets and sound relationships with banks.
We believe the company has prudent financial policy and risk management, which can help absorb the impact of potential negative events.
Principal liquidity sources include: Cash and equivalents of around KRW800 billion as of March 31, 2017.Funds from operations of around KRW1.3 trillion in the 12 months to March 31, 2018.
Principal liquidity uses include: Debt maturity of about KRW490 billion in the 12 months to March 31, 2018.
Committed capex of around KRW400 billion during the same period.Dividend payouts of KRW560 billion in the same time.

The stable outlook reflects our view that HTC's balanced product portfolio between the olefins and aromatics value chain, good cost structure, and high operating efficiency will enable the company to maintain its credit metrics over the next 24 months. We may raise the rating if HTC's debt-to-EBITDA ratio remains below 1x on a sustained basis regardless of fluctuations in the profitability from the petrochemical industry cycle.

This could happen if the company maintains tight financial management such as low capex and dividend payments, in other words, due to low debt rather than strong operating cash flows on the back of higher-than-expected petrochemical margins. We may lower the rating if HTC's debt-to-EBITDA ratio approaches 3x.

This could happen as a result of a deterioration in operating cash flows potentially due to weaker-than-expected petrochemical margins, major acquisitions, and higher capex and dividend payments than we anticipate. We may also downgrade HTC if its relationship with Total weakens significantly, potentially from a reduction in Total's ownership in the company. However, we see this as unlikely over the next 12 months.


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