Fitch Ratings has affirmed China-based Sinochem International Corporation's (SIC) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'.

The Outlook is Stable.

Fitch rates SIC on a top-down basis under its Parent and Subsidiary Linkage (PSL) Rating Criteria. This reflects the low legal, medium strategic and high operational incentives for the ultimate parent, Sinochem Holdings Corporation Ltd., to provide support.

Our internal assessment of Sinochem Holdings, which is wholly owned by China's State-owned Assets Supervision and Administration Commission of the State Council, is derived on a top-down basis from the Chinese sovereign (A+/Stable) under our Government-Related Entities Rating Criteria.

The Stable Outlook reflects our expectation that linkages between Sinochem Holdings and SIC will remain intact.

Key Rating Drivers

State Control, Support of Parent: We assesses Sinochem Holdings' status, ownership and control by the Chinese state as 'Strong', as the government fully owns and controls the company. We assess Sinochem Holdings' support record as 'Strong'. The company and its predecessors have consistently received government policy and financial support. We expect Sinochem Holdings to continue receiving state support, given its strategic importance to China's agricultural industry and food security as well as the development of the chemical industry.

Parent Crucial for Agriculture: We assess the socio-political implications of a default by Sinochem Holdings as 'Very Strong', as the company is pivotal in China's supply of chemicals for agriculture. We assess the financial implications of a default as 'Strong'. Financial distress at Sinochem Holdings would limit funding for other state-owned enterprises, as the company and its subsidiaries are active domestic and offshore bond issuers.

Parental Linkages Underpin Rating: SIC's ratings are derived from our internal assessment of the creditworthiness of Sinochem Holdings under our PSL criteria where Sinochem Holdings is the stronger parent. SIC is 54.61% indirectly owned by Sinochem Holdings via Sinochem Group and Sinochem Corporation, which are wholly owned subsidiaries of Sinochem Holdings. We deem Sinochem Group and Sinochem Corporation intermediate entities and expect support to SIC to flow directly from the ultimate parent, Sinochem Holdings.

High Operational Incentive: We assess the operational incentive to support SIC as high. Sinochem Holdings is the ultimate controlling shareholder of SIC. Sinochem Holdings and its relevant offices oversee, monitor and approve SIC's key operational, investment and finance decisions.

SIC's basic chemical materials, chemical intermediaries, high-performance materials and polymer additives businesses are integral to Sinochem Holdings' core chemical materials operations. Substantial synergies exist between SIC's chemical-material businesses, and the basic chemicals and materials units within Sinochem Holdings.

Medium Strategic Incentive: We assess the strategic incentive to support SIC as medium. SIC accounted for around 6%-7% of Sinochem Holdings' revenue and EBITDA. SIC is a leading producer of epichlorohydrin, caustic soda, dichlorobenzene series, nitrochlorobenzene, chlorobenzene, epoxy resin, ABS and antioxidant 6PPD in China and the world. In addition, SIC has established and expanded its lithium battery materials production capacity in recent years.

SIC's leading market positions and presence in product categories with growing demand provide considerable competitive advantage to Sinochem Holdings' materials and chemicals operations.

Low Legal Incentive: We assess the legal incentive to support SIC as low because of the absence of legal ties between SIC and its ultimate parent, Sinochem Holdings, as well as intermediate parents Sinochem Group and Sinochem Corporation, in the form of guarantees and cross-defaults.

Leverage to Rise on Capex: SIC's leverage will remain high in 2022-2023 due to investment in its chemical and materials production facilities. We expect SIC's net debt/EBITDA to rise to 7.0x-7.2x in 2022-2023, from 4.5x in 2021, as capex may reach CNY9 billion in 2022 and CNY7 billion in 2023, against CNY8.7 billion in 2021. The rise in leverage in 2022 is also partly due to the sale of SIC's agrochemical business, which weakened its profitability, as the segment was an important profit generator for SIC.

Derivation Summary

SIC's PSL assessment is comparable with that of China National Bluestar (Group) Co, Ltd (Bluestar, A-/Stable), which is also a subsidiary of Sinochem Holdings. SIC and Bluestar are both important material and chemical products manufacturing units of Sinochem Holdings. SIC focuses on the development and production of chemical intermediaries, polymer additives, high-performance materials and lithium battery materials, while Bluestar specialises in organosilicon monomers, polyphenylene oxide (PPE), paste polyvinylchloride (PVC) resin, methionine and electrolysers.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Revenue growth of 3.2%-7.4% during 2022-2025;

EBITDA margin of 5.6%-6.3% during 2022-2025;

Capex of CNY5 billion-9 billion a year during 2022-2025;

No major M&A and equity financing.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on the Chinese sovereign and/or increased likelihood of state support to Sinochem Holdings, provided the linkages between SIC and Sinochem Holdings remain intact;

Evidence of stronger linkages between SIC and Sinochem Holdings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on the Chinese sovereign and/or decreased likelihood of state support to Sinochem Holdings, provided the linkages between SIC and Sinochem Holdings remain intact;

Weakening linkages between SIC and Sinochem Holdings.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in our rating action commentary of 2 June 2022:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Structural Features: A continued rise in macro-financial risks, for example through failure to maintain credit growth at a level close to nominal GDP growth over the next few years.

Public Finances: A sharp upward trend in government debt/GDP or a crystallisation of contingent liabilities that leads to a significant rise in government debt relative to 'A' peers.

External Finances: Sustained capital outflows sufficient to erode China's external balance-sheet strengths relative to 'A' peers, which would cause the removal of the +1 Qualitative Overlay (QO) notch on External Finances.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Structural Features: A material reduction in macro-financial risks and associated contingent liabilities facing the sovereign, for example, by maintaining credit growth below nominal GDP growth over a multi-year period, which would cause the removal of the -1 QO notch on Structural Features.

External Finances: Widespread adoption of the Chinese yuan as a reserve currency, as reflected in a substantial increase in the share of yuan-denominated claims in the IMF's currency composition of official foreign exchange reserves (COFER) database.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: SIC had short-term debt of CNY12 billion at end-2021, which can be covered by available cash of CNY2 billion and over CNY51 billion in unused banking facilities. These facilities are uncommitted, as committed facilities are uncommon in China's banking system. In addition to debt financing, SIC has access to the equity capital market as it is listed on the Shanghai Stock Exchange.

SIC said in March 2022 that it planned to raise a maximum of CNY5 billion through a private equity placement. Its direct parent, Sinochem Corporation, has agreed to subscribe to the placement shares according to the shareholding prior to the issuance. The planned equity placement will help to improve SIC's liquidity and leverage. However, we did not include any equity issuance in our forecasts, as the placement still requires relevant regulatory approval and is dependent on market conditions.

Issuer Profile

SIC (600500.SH) is a state-owned enterprise that manufactures and distributes high-performance materials, chemical intermediates, polymer additives and natural rubber products. It provides products and services to over 100 countries and regions.

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

SIC's rating is derived from Fitch's internal assessment of the creditworthiness of parent Sinochem Holdings., which is assessed on a top-down approach from the Chinese sovereign.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire