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.

We rate SIC on a top-down basis under our 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 state 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 (SOEs), 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 54.54% 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 its ultimate parent, Sinochem Holdings.

'High' Operational Incentive to Support: Sinochem Holdings, SIC's ultimate controlling shareholder, and its relevant offices oversee, monitor and approve SIC's key operational, investment and financing decisions. SIC's basic chemical material, chemical intermediary, high performance material and polymer additive businesses are integral to Sinochem Holdings' core chemical material operations. Substantial synergies exist between SIC's chemical material businesses, and the basic chemical and material units within Sinochem Holdings.

'Medium' Strategic Incentive to Support: SIC is a key chemical material production unit of Sinochem Holdings. It is a leading producer of epichlorohydrin, caustic soda, dichlorobenzene series, nitrochlorobenzene, chlorobenzene, epoxy resin, acrylonitrile butadiene styrene, and antioxidant 6PPD in China and the world. In addition, SIC has established and expanded its lithium battery material 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' material and chemical operations. SIC's financial contribution is low, at below 10% of the parent's revenue and EBITDA, but it may rise gradually as SIC's new production facilities begin to generate meaningful sales and profit.

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

Focusing on Chemical Material Production: SIC completed the sale of a 36% stake in Halcyon Agri Corporation Limited (HAC), its natural-rubber operation platform, for around USD181 million in February 2023. HAC ceased to be consolidated in SIC's accounts after the transaction, which marks SIC's exit from the natural-rubber business. In addition, SIC completed a CNY5 billion equity placement in December 2022. These transactions replenished SIC's funding and further supported its strategic shift towards a leading chemical production enterprise with a focus on new chemical materials.

Leverage to Stabilise Gradually: We expect SIC's net leverage, measured by net debt/EBITDA, to stabilise gradually at 5x-6x in 2023-2026 on steady expansion in EBITDA and a controlled investment pace. SIC's net leverage fell to 3.6x in 2022, from 4.5x in 2021, supported by the A-share equity placement and strong performance of its new chemical material segment. However, SIC's net leverage is likely to return to above 5x in 2023 on weakened core businesses amid a retreat in prices and demand for chemical materials and investment in chemical material production facilities.

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 product 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, paste polyvinylchloride resin, methionine and electrolysers.

Key Assumptions

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

Revenue to decline by 23% in 2023 and rise by 1.9%-2.3% a year during 2024-2026;

EBITDA margin of 6.5%-7.6% during 2023-2026;

Capex of CNY4.5 billion-5.5 billion a year during 2023-2026.

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 15 December 2022:

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

Public Finances: A sustained upward trajectory in government debt/GDP or a rise of contingent liabilities, such that debt levels compare less favourably with rated peers.

Macro: The recurrence of abrupt policy shifts that undermine economic performance and keep growth volatility at elevated levels.

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 around CNY6 billion at end-2022, which can be covered by about CNY3.7 billion in available cash and CNY62 billion in unused banking facilities. These facilities are uncommitted, as committed facilities are uncommon in China's banking system.

Issuer Profile

SIC is a SEO that manufactures and distributes high-performance materials, chemical intermediates and polymer additives. It sells 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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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