The Outlook revision reflects our view that HMC's financial leverage, measured by net debt/EBITDA, will remain below 3.3x, a negative threshold for its current rating, in 2022, supported by a buffer from its stronger-than-expected operating cash flows in 2021. Fitch expects HMC's EBITDA to decrease and its free cash flow after dividend payment to remain negative in 2022. Its net debt/EBITDA is likely to increase, but should be below 3.3x in 2022.
HMC's rating incorporates a one-notch uplift from the 'bbb+(tha)' Standalone Credit Profile (SCP), as Fitch has assessed that HMC has moderate linkages with
HMC's SCP reflects its position as the largest PP producer in
Key Rating Drivers
Higher Headroom: HMC's net debt/EBITDA fell to 1.7x in 2021 (2020: 2.6x), better than our expectation of an increase to 3.5x-4.0x, on stronger-than-expected EBITDA and lower project costs for a new plant, PP Line 4. This will provide larger headroom to support its remaining capex in 2022 and lower operating cash flow from a delay in PP Line 4's start-up. HMC's EBITDA rose to
EBITDA to Soften: Fitch expects HMC's EBITDA to drop to about
PP Line 4 Delay: HMC expects to postpone PP Line 4's start-up to 2H22 from 1H22 due to pandemic-related disruptions. However, it said the project costs will be reduced by about 14%, from a previous target of 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 of these products increased to around 55% in 2021, from about 35% in 2015, although this will drop during PP Line 4's ramp-up. The company aims to raise the contribution to about 70% of sales by 2030. HMC said these products provide a premium of about 5% over its commodity PP product price, which supports its higher profitability than competitors.
Leading South-East Asian PP Producer: HMC is the largest PP producer in
Leading Technology, Product Innovation: HMC uses leading PP technology from
Cyclicality and Limited Diversification: HMC's credit profile is tempered by its limited product diversification and the inherent cyclicality of the industry. The company's earnings and cash flow are affected significantly by volatile petrochemical prices and margins, and demand-supply dynamics. HMC also produces only PP products, making it less diversified than domestic chemical peers.
Linkage with PTTGC: We assess that parent PTTGC has 'Medium' incentive to support HMC under Fitch's 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 their strategic linkages. Fitch believes PTTGC is likely to provide extraordinary support to HMC, if needed, without any constraints on the support. These underpin our assessment of 'Medium' strategic incentive.
PTTGC does not have management control over HMC, as
Derivation Summary
HMC's business profile is moderate relative to that of Thai downstream oil and gas, and chemical peers. Its financial profile is also moderate during the normal run of business.
HMC has a smaller operating scale as well as lower upstream integration and product diversification than
HMC's business profile is slightly stronger than that of other companies in the polymer and plastic-product business, including
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Sales volume to increase by about 15% in 2022 (2021: -11%) due to the absence of a planned major turnaround and the start-up of PP Line 4, and by about 24% in 2023 due to PP Line 4's full-year operation;
Product-to-feed spreads to narrow in 2022 and gradually improve in 2023-2024;
PP Line 4 to start operating in 4Q22, adding capacity of 250,000 tonnes per annum;
Capex of
Dividend payout ratio at 90% for 2022-2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Substantial improvements in the business profile, including materially larger scale and/or better product diversification, while reducing net debt/EBITDA to below 2.3x on a sustained basis;
Evidence of stronger ties with PTTGC.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration in operating performance, or additional capex and high dividend payouts, which sustain net debt/EBITDA above 3.3x;
Weakened ties with PTTGC.
Liquidity and Debt Structure
Satisfactory Liquidity: HMC had outstanding debt of
Issuer Profile
HMC, the first 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.
RATING ACTIONS
Entity / Debt
Rating
Prior
Natl LT
A-(tha)
Affirmed
A-(tha)
senior unsecured
Natl LT
A-(tha)
Affirmed
A-(tha)
Page
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