The rating action follows the Outlook revision on SCGC's parent, The Siam Cement Public Company Limited (SCC), to Negative from Stable, and the affirmation of SCC's 'A+(tha)' National Long-Term Rating. SCGC's ratings are equalised with that of its stronger parent under Fitch's Parent and Subsidiary Linkage (PSL) Rating Criteria. The Negative Outlook reflects deleveraging challenges faced by SCC over the next 12-18 months.
We assess SCGC's Standalone Credit Profile (SCP) at 'a-(tha)', constrained by our higher leverage that we expect over 2022-2023 due to high capex. This is counterbalanced by SCGC's strong market position as one of south-east Asia's leading petrochemicals producers, serving multiple end-markets.
KEY RATING DRIVERS
Deleveraging Challenge at SCC: Fitch expects SCC's net debt/EBITDA to reach 4.5x-5.0x by end-2022, driven mainly by its high capex plan of up to THB85 billion, the majority of which is for the Long Son Petrochemicals (LSP) project in Vietnam which will start generating cash inflow in 2023. The high inflationary operating environment creates uncertainty for the pace of its deleveraging target.
Weaker-than-expected business recovery and LSP's earnings contribution, as well as higher-than-expected capex without equity injection, could lead to negative rating action.
'Medium' Legal Support Incentives: We assess SCC's legal incentives to support SCGC as 'Medium', as the parent unconditionally and irrevocably guarantees credit facilities of USD3.2 billion on SCGC's LSP project in Vietnam. We expect guaranteed debt to rise until 2023 as SCGC progresses to project commissioning, at which point guaranteed debt is likely to reach around 50% of SCGC's debt and then remain at between 20%-50%.
'High' Strategic Support Incentives: SCC's 'High' strategic incentive to support SCGC is underpinned by SCGC's significant 40%-50% contribution to the parent's consolidated EBITDA. This is the highest among the parent's three core businesses; the others being cement and building materials (25%-35% of SCC's EBITDA), and packaging (20%-30% of SCC's EBITDA). SCGC also accounts for the majority of SCC group's fixed-asset investment, which we expect to rise from ongoing investment in the LSP project.
'Medium' Operational Support Incentives: We regard the level of management and brand overlap between SCC and SCGC as 'High'. SCC integrates management decisions on key subsidiaries, including SCGC, with the common 'SCG' brand for products sold across its cement and building materials, chemicals, and packaging businesses. However, we view operational synergies between SCC and SCGC as 'Weak', as each business is part of an independent value chain. This leads to immaterial avoidance cost of SCGC's operations to the parent, limiting operational incentives to provide support.
Planned IPO Neutral to Linkages: SCC filed the IPO of SCGC with the local Securities and Exchange Commission in April 2022. The IPO is planned to be completed by end-2022. Fitch does not expect the legal and strategic linkages between SCC and SCGC to change significantly if the IPO is completed. However, the IPO proceeds could be positive for SCGC's SCP and also SCC's financial profile if directed to reduce debt and leverage substantially. We have not factored any equity proceeds into our assessment as the IPO is subject to market uncertainties and execution risk.
High Leverage Constraints SCP: We expect SCGC's funds from operations (FFO) net leverage to increase to around 7.0x by end-2022 (end-March 2022: 5.1x, end-2021: 3.8x), mainly on high capex amid weak petrochemicals spreads. The remaining capex for the LSP project is THB50 billion, which will be spent in 2022-2023. The leverage should fall to around 5.0x by end-2023 once the project is commissioned and with no major capex plan.
Earnings Pressures: Any impact from higher crude costs and disrupted freight flow on SCGC's EBITDA in 2022 is likely to be more severe than previously projected. We expect SCGC's EBITDA to decline by around 40% to about THB20 billion in 2022 (2021: THB33 billion), with an EBITDA margin of around 7% (1Q22: 4.6%, 2021: 14.1%).
Fitch expects an organic improvement in the chemicals industry on the back of stronger demand and easing supply-chain disruption in 2023, together with the earnings contribution from LSP project to support SCGC's EBITDA growth of around 50% to around THB30 billion in 2023.
Leading Market Position: SCGC's SCP benefits from the company's leading market position in Thailand and ASEAN, where it has the second-largest capacity of polyolefins and the largest capacity of polyvinyl chloride (PVC) products by equity stake. We expect SCGC's market position to improve over the medium term. The LSP project, the first and largest petrochemical complex in Vietnam, will increase SCGC's polyolefin capacity by around 50% and make the company the largest polyolefins producer in ASEAN when it is commissioned in 2023.
DERIVATION SUMMARY
SCGC's National Long-Term Rating is equalised with its parent's rating, reflecting 'Medium' legal, 'High' strategic and 'Medium' operational incentives to provide support. SCGC's SCP, on the other hand, reflects its leading market position in ASEAN in its core polyolefins and PVC products. However, the SCP is constrained by SCGC's mode of expansion, which will pressure its financial leverage over the next two years.
We regard the linkages between SCC and SCGC as stronger than those between SCC and its packaging-subsidiary, SCG Packaging Public Company Limited (SCGP, A+(tha)/Negative, SCP: a(tha)). This is because SCGC has stronger legal links with its parent, as reflected in a corporate guarantee of around 50% of SCGC's debt, which is not available to SCGP, and SCGC's higher strategic importance, given its much larger financial contribution to the group and share of group investments.
SCGC's SCP is weaker than that of PTT Global Chemical Public Company Limited (PTTGC, AA+(tha)/ Negative, SCP: aa-(tha)). PTTGC is Thailand's largest integrated refining and petrochemical operator, with larger operating scale and product diversification. It also has a more conservative financial profile.
The SCPs of SCGC and Thai Oil Public Company Limited (TOP, A+(tha)/Negative, SCP: a-(tha)) - Thailand's largest and most complex oil refiner - are the same. Both companies have comparably strong business positions in their respective industries. However, SCGC has higher operating EBITDA, as TOP is exposed to a more volatile refinery business with a thinner operating profit margin. Both companies face high investments, elevating financial leverage, but the greater risks to TOP's deleveraging pace over the near term are reflected in the Negative Outlook.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to rise by around 20% in 2022 (1Q22: +34%, 2021: +62%), due mainly to costs pushing up product prices and increasing sales volumes, and to rise further by around 15% in 2023 as the LSP plant starts operating.
- EBITDA margin to stay low at 6%-7% in 2022 and rebound to 9% in 2023 (1Q22: 4.6%, 2021: 14.1%), given weak petrochemical spreads.
- Capex and investment plan totalling THB63 billion over 2022-2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The rating Outlook could be revised to Stable if the rating Outlook of SCC's National Long-Term Rating is revised to Stable, provided linkages remain intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A weakening of linkages between SCGC and SCC
For the ratings on SCC, the following sensitivities were outlined by Fitch in the Rating Action Commentary published on 16 June 2022:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The rating Outlook could be revised to Stable if SCC's net debt/EBITDA falls to below 3.5x by 2023, provided it has stronger-than-expected operating cash flow or cash inflow from the equity injection.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Net debt/ EBITDA above 3.5x for a sustained period.
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity: SCGC has THB80 billion of debt maturing within the 12 months to end-March 2023, 55% of which is inter-company loans from the parent, which are revolving in nature. SCGC's liquidity is supported by SCC via the group's treasury pool, but the funding requirement for the LSP capex plan over the next two years will be met by committed credit facilities from banks. The company's liquidity is also supported by operating cash flow of about THB20 billion-30 billion a year.
ISSUER PROFILE
SCGC is a wholly owned subsidiary and a key chemicals operating arm of SCC, one of Thailand's largest industrial conglomerates. SCGC is the second-largest downstream chemicals producer in Thailand and ASEAN for its main products, polyolefins and PVC.
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
SCGC's ratings are linked to SCC's rating.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings