Fitch Ratings (Thailand) has downgraded polypropylene (PP) manufacturer HMC Polymers Company Limited's National Long-Term Rating and senior unsecured rating to 'BBB+(tha)' from 'A-(tha)'.

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 PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Negative, SCP: a+(tha)) under Fitch's Parent and Subsidiary Linkage criteria. PTTGC is HMC's largest shareholder, with a 41% stake.

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 THB900 million in 2025 and THB2.4 billion in 2026 with EBITDA net leverage at 14.7x and 6.0x, respectively. However, if demand recovery is below our expectation, this would lead to a further negative rating action.

HMC's net debt is likely to increase by about THB1.4 billion in 2024-2025 due to negative free cash flow (FCF) from weak EBITDA. However, its liquidity is supported by an available committed facility of about THB7.0 billion until at least December 2025. We forecast net debt to decrease from 2026 and EBITDA net leverage to fall to 3.6x in 2027.

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 LyondellBasell Industries N.V. (BBB/Positive) is also involved in the appointment of HMC's directors and key senior management. In addition, all of HMC's products use LyondellBasell's global brand names. We therefore assess the operational incentive as 'Weak', the same as the legal incentive.

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 China's GDP growth remaining below pre-Covid-19 levels until at least 2026. New capacity is likely to continue, especially in PP. We expect the pace of new capacity additions to abate in 2025, supporting a gradual margin recovery, although the recovery of PP spreads is likely to take longer given its higher new capacity.

Capex Continues to Decrease: Fitch expects capex to decline in 2024 (2023: THB1.1 billion), as HMC does not have any large capex plans following completion of the PP Line 4. We believe HMC will remain cautious on capex, especially in 2024-2025 when the market is likely to remain weak. Fitch forecasts capex of about THB1.5 billion in total for 2024-2025, mainly for maintenance capex.

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 THB3.1 billion. A sale of all of its stake in PTTGC at the current market price would reduce EBITDA net leverage to 11.9x in 2025, 4.8x in 2026 and 2.8x in 2027.

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 LyondellBasell, a key shareholder, in its production. It uses the latest technology for its PP Line 4 - one of only two plants in the world that can use hexene co-monomer to enhance PP properties - and to expand its product portfolio for new applications. HMC is the leader in pipe- and medical-grade PP in Thailand, and is the world's first producer of PP for dielectric film using modern technology. All of HMC's products use LyondellBasell's global brands.

Derivation Summary

HMC has a smaller operating scale as well as lower upstream integration and product diversification than IRPC Public Company Limited (BBB+(tha)/Stable, SCP: bbb-(tha)). However, HMC is more advanced in product and technology, and generates higher margins, even excluding the refinery business, due to its focus on differentiated and specialty products.

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 Global Green Chemicals Public Company Limited (GGC, A-(tha)/Negative, SCP: bbb(tha)), a Thailand-based producer of biodiesels and oleochemicals. However, GGC's lower financial leverage compensates for its weaker business profile, resulting in GGC's SCP being equal to that of HMC. Similar to HMC, the Negative Outlook on GGC reflects risk to lowering leverage.

HMC's business profile is slightly stronger than that Eastern Polymer Group Public Company Limited (EPG, A-(tha)/Stable), an operator in the polymer and plastic-product business. We believe HMC's leading market position in south-east Asia offsets its fewer end-user segments compared with that of EPG. However, HMC's much higher financial leverage leads to a lower SCP than that of EPG.

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 THB1.5 billion in total over 2024-2025;

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 THB15.8 billion at end-2023, consisting of THB500 million in short-term loans, THB8.3 billion in debentures and THB7.0 billion in long-term bank loans. Debt maturing during 2024 of THB1.7 billion, including short-term loans, and our expectation of negative FCF will be supported by cash on hand of THB1.1 billion and committed, available revolving credit facilities of THB7.0 billion. HMC received the committed revolving credit facilities of THB7.5 billion from two domestic banks in January and May 2023, with three- and five-year terms.

HMC expects to refinance THB1.3 billon debentures maturing in 2025 with new debentures.

Issuer Profile

HMC is the first and largest PP manufacturer in Thailand. The company operates four lines of PP with a total capacity of 1.06 million tonnes per annum. PP Line 4 started commercial operation in December 2022. Its products are sold under LyondellBasell brand names.

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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