Fitch Ratings has affirmed China-based Syngenta Group Co., Ltd.'s (Syngenta Group) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'A'.

The Outlook is Stable. A full list of rating actions is at the end of this commentary.

Syngenta Group is rated using a top-down approach under Fitch's Parent and Subsidiary Linkage Rating Criteria, which reflects high incentives to support from the ultimate parent, Sinochem Holdings Corporation Ltd., through the intermediate parent, China National Chemical Corporation Limited (ChemChina, A/Stable). Syngenta Group is Sinochem's most important subsidiary, as it controls the group's entire agrochemical businesses.

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

The Stable Outlook reflects Fitch's expectation that linkages between Sinochem, ChemChina and Syngenta Group will remain strong.

Key Rating Drivers

Sinochem Linked to State: Fitch assesses Sinochem's status, ownership and control by the Chinese state as 'Strong' because of the government's full ownership and control of the company. We also view Sinochem's support record as 'Strong'. Sinochem and its predecessors have consistently received government policy and financial support. We expect it to continue receiving state support due to its strategic importance to China's agricultural industry and food security, as well as the development of the chemical industry.

The socio-political implications of a default by Sinochem are 'Very Strong', as the company plays a pivotal role in China's supply of chemicals for the agricultural industry. We assess the financial implications of a default as 'Strong'. Financial distress at Sinochem would limit funding for other state-owned enterprises, since Sinochem and its subsidiaries are active domestic and offshore bond issuers.

Parental Linkage Drives Ratings: We expect support to Syngenta Group to flow directly from Sinochem through ChemChina, which acts as an intermediate legal entity. Syngenta Group's ratings are derived from our assessment of Sinochem's creditworthiness and its high operational and strategic incentives to provide support. We assess the legal incentives as 'Medium' because ChemChina still provides guarantees on the bonds issued for the Syngenta AG acquisition, which accounted for over 20% of Syngenta Group's total debt by end-September 2022.

High Incentive to Support: Sinochem has absolute control over Syngenta Group, which is its most important subsidiary and is highly integrated within the group structure in terms of management and operations. We expect favourable growth prospects for Syngenta Group, especially in China's agriculture market. Its strategic importance is underpinned by its control of Sinochem's agricultural businesses. Syngenta Group contributed 34% of Sinochem's EBITDA while holding 32% of the parent's total assets in 2021.

Strong Business Profile: Syngenta Group's Standalone Credit Profile is supported by its strong business profile, which has large scale, leading market positions in all core business segments, and product and geographical diversification. Syngenta Group focuses on R&D-intensive agrochemicals with strong profitability and low price volatility. Its significant R&D expertise and broad distribution channels serve as barriers to entry over the medium term. Support from the state and its parents also strengthens its position in China's fast-growing agricultural market.

Improving Leverage: We expect Syngenta Group's EBITDA net leverage to improve to around 5.0x by end-2022, from 5.5x in 2021, on strong 9M22 performance. Revenue grew by 26.3% in 9M22, driven by higher sales volume and selling prices of key products, while EBITDA margin stayed largely stable due to strong cost pass-through amid rising input prices. Its trailing 12-month EBITDA net leverage fell to about 5.1x at end-September 2022. We expect continued deleveraging over 2023-2025, supported by our forecast of sustainable EBITDA growth as well as disciplined expansionary capex and M&A spending.

Syngenta Group is in the process of applying for an IPO and plans to raise USD10 billion by floating about 20% of its shares. We expect successful execution of the IPO to accelerate deleveraging to an EBITDA net leverage of below 3.0x in 2023.

Derivation Summary

Syngenta's strong operational and strategic linkages with its parent are comparable with those of COFCO (Hong Kong) Limited (COFCO HK, A/Stable), which is wholly owned by COFCO Corporation.

COFCO HK is the parent's key intermediate shareholding platform for its global expansion and enables the group to procure grain and other agricultural produce from overseas through a subsidiary. COFCO has absolute management control over COFCO HK, with centralised treasury management, board appointments and frequent intercompany transactions. Syngenta is, similarly, strategically important to Sinochem via its control over all of the group's agrichemical assets, and is highly integrated within the group structure in terms of management and operations.

Key Assumptions

Revenue to increase by 15% in 2022, followed by 9%-11.5% growth per year over 2023-2025

EBITDA margin to remain at around 15% over 2022-2023 and gradually decline to 14.5% in 2025

Capex/revenue ratio at 6%-6.5% during 2022-2025

Dividend payout ratio of 30% following the completion of the IPO

Receipt of USD10 billion IPO proceeds in 2023

RATING SENSITIVITIES

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

Positive rating action on the Chinese sovereign

Increased likelihood of state support to Sinochem

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

Negative rating action on the Chinese sovereign

Decreased likelihood of state support to Sinochem

Weakening linkages between Sinochem, ChemChina and Syngenta Group

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

Adequate Liquidity: Syngenta Group had readily available cash and cash equivalents of about CNY23 billion as of end-June 2022. This compares with the company's short-term debt of over CNY47 billion, as well as another USD5.5 billion of perpetual bonds with effective maturity in a year based on Fitch's Corporate Hybrids Treatment and Notching Criteria. However, it also had available credit facilities of about USD13 billion onshore and offshore, which support its liquidity profile.

Issuer Profile

Syngenta Group is the world's largest agrichemical company, occupying top positions in crop protection, seeds and crop nutrition products markets. It provides national food security and supports the transformation of China's agriculture industry.

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

Syngenta Group's IDR is linked to our internal assessment of Sinochem.

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

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