Fitch Ratings (
The Outlook remains Negative.
The downgrade reflects our expectation that HMC's EBITDA net leverage will remain high over the medium term, due to weak PP/propylene spreads and expectation of a subdued market recovery. The high leverage stems from the slower recovery in EBITDA than we had expected, due to challenging conditions in the petrochemical segment, particularly in PP. The Negative Outlook continues to reflect risks to HMC improving its operating cash flow over the next three years.
HMC's rating incorporates a one-notch uplift from its 'bbb(tha)' Standalone Credit Profile (SCP), based on our assessment of Medium strategic support incentives from parent
Key Rating Drivers
High Leverage from Slower Recovery: We expect HMC's EBITDA recovery in 2024-2027 to be slower than our previous forecasts, due to slower-than-expected recovery of PP spreads. This will cause HMC's EBITDA net leverage to remain high in 2024-2026, and above Fitch's negative rating sensitivity of 4.3x. We expect EBITDA to remain negative in 2024, before recovering to
HMC's net debt is likely to increase by about
Linkage with PTTGC: We assess that PTTGC has a 'Medium' strategic incentives to support HMC under our Parent and Subsidiary Linkage Rating Criteria. HMC is a propylene off-taker of PTTGC, and its key vehicle in the PP business. HMC has a non-compete arrangement with PTTGC for petrochemical products, reflecting the strategic linkages. We believe that PTTGC is likely to provide extraordinary support to HMC, if needed.
PTTGC does not have management control over HMC, as
Weak PP Spreads: We expect PP spreads to remain weak in 2024 amid uncertain Chinese demand, softening global growth and industry overcapacity. We believe consumer demand in the region is likely to be sluggish, particularly as we see
Capex Continues to Decrease: Fitch expects capex to decline in 2024 (2023:
Credit Terms Extension: HMC has requested to extend its credit terms on feedstock purchases from PTTGC, to 90 days from 30 days, subject to PTTGC's approval. The extension would last until end-2025 with a mutual agreement for renewal. Fitch expects HMC to get an approval from PTTGC and extend the credit terms to 90 days from 30 days in 2024. However, this will not help to reduce financial leverage materially in 2024-2026.
Possible Divestment to Reduce Leverage: HMC could sell its 1.85% stake in PTTGC to lower leverage. However, Fitch has not taken this into account in the forecasts because a stake sale remains uncertain and subject to market conditions. The market value of this holding is about
Focus on High-Value-Added Products: HMC focuses on differentiated and specialty products, which have lower competition and higher margins. The proportion of sales from these products increased to 50%-55% in 2020-2023, from about 35% in 2015. The company aims to raise the contribution to about 70% of sales by 2030. HMC said the products provide a premium of about 10% over its commodity PP product price, supporting higher profitability than its competitors.
Leading Technology, Product Innovation: HMC uses leading PP technology from
Derivation Summary
HMC has a smaller operating scale as well as lower upstream integration and product diversification than
This, together with our expectations of stronger credit metrics - in line with the historical trend - results in HMC's SCP being one notch higher than that of IRPC. However, HMC faces the risks associated with high leverage over the next two to three years, as reflected in the Negative Outlook on its rating.
HMC's business profile is stronger than that of
HMC's business profile is slightly stronger than that
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Sales volume to increase only slightly in 2024 by about 2% (2023: -5%) and to increase by about 12%-13% in 2025-2026 as we expect more demand recovery;
Flat PP/propylene spreads in 2024, gradually improving in 2025-2026;
Capex of
Extension of credit terms on feedstock supply from PTTGC to 90 days in 2024-2027, from 30 days;
No dividend payment until 2027.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
The Outlook could be revised to Stable if Fitch believes that HMC is on track to reduce EBITDA net leverage to below 4.3x on a sustainable basis, while PTTGC's incentive to provide support remains unchanged.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Weaker operating cash flow than we expect due to slower demand recovery and/or increasing debt-funded investments or dividend payouts, resulting in EBITDA net leverage remaining above 4.3x for a sustained period;
Weakened incentive to provide support from PTTGC to HMC.
Liquidity and Debt Structure
Manageable Liquidity: HMC had outstanding debt of
HMC expects to refinance
Issuer Profile
HMC is the first and largest PP manufacturer in
Summary of Financial Adjustments
Preferred shares, which are proportionately held by shareholders, are excluded from debt.
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
HMC's rating receives a one-notch uplift, based on our assessment of 'Medium' incentives for support from the parent, PTTGC.
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