Formosa Plastics Corp.

Primary Credit Analyst: Apple Lo, Hong Kong (852) 2533-3542; [email protected]

Secondary Contact: Raymond Hsu, CFA, (8862) 8722-5827; [email protected]

Table Of Contents

Rationale

Outlook

Standard & Poor's Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Other Credit Considerations

Group Influence

Ratings Score Snapshot

Reconciliation

Related Criteria And Research

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Business Risk: SATISFACTORY CORPORATE CREDIT RATING Vulnerable Excellent bbb+ bbb+ bbb

BBB+/Stable/-- Financial Risk: INTERMEDIATE

Highly leveraged Minimal

Anchor Modifiers Group/Gov't

Greater Regional Scale National Scale

cnA+/--/-- twAA-/Stable/twA-1+

Rationale

Business Risk: Satisfactory Financial Risk: Intermediate

• Strong operating efficiency and product diversity. • Improving cash flow adequacy in 2015-2016. • Strong domestic market position in the • Anticipated improvement in the group's leverage, petrochemical and oil refining industries. due to improving profitability and debt reduction • Higher risk non-core investments. efforts. • Highly cyclical commodity chemical industry. • Reduction of ownership in and debt guarantee on • Asset concentration and rising regulatory risk on Formosa Ha Tinh Steel Corp. environmental protection. • Disposable investment enhances its financial flexibility.

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Outlook: Stable

The rating outlook is stable, based on our assessment that the Formosa Plastics (FP) group will continue to lower its debt through its operating cash flows, repayment of intercompany loans from affiliate companies, and lower debt guarantee for Vietnam-based Formosa Ha Tinh Steel following the completion of capital injections by strategic investors. This, together with better profitability, should improve the group's ratio of FFO to debt to 30%-40% in 2015-2016.

Downside scenario We may lower the long-term rating if the FP group's ratio of FFO to debt stays below 25% for an extended period of time. The likely scenarios for such a below-expectation performance are: (1) market conditions worsen substantially due to a much weaker regional economy than we previously forecast; or (2) the group takes on more aggressive cash dividend payments or capital expenditures that are substantially beyond our base case.

Upside scenario The likelihood of an upgrade is low over the next 12 months, given the FP group's still relatively high leverage and a relatively weak chemical market in Asia-Pacific. However, we may raise long-term rating if the FP group keeps its ratio of FFO to debt above 45% on a sustainable basis. Situations that could lead to such an improvement include: (1) a more conservative financial policy to maintain a significantly lower debt level than the group currently has; or (2) a sustainable strengthening in the group's profitability through a better mix with more high-margin products; or (3) improving cost competitiveness such as a reduction in tariff barriers for the group's exports to major markets.

Standard & Poor's Base-Case Scenario

Assumptions Key Metrics

• Projected growth in China's GDP of 6.8% in 2015 2014A 2015E 2016E and 6.3% in 2016, and growth in Taiwan's GDP of EBITDA margin 6.8% 15.0%-16.0% 13.5%-14.5% 1.5% in 2015 and 2.2% in 2016. Debt/EBITDA 5.9x 2.0x-3.0x 2.0x-3.0x • Product pricing for major commodity chemicals to FFO/Debt 16.3% 30.0%-40.0% 30.0%-40.0% remain weak due to slowing demand growth in China and low oil prices. Lower input costs will A--Actual; E--Estimate; FFO--Funds from operations. improve margins. • The FP group could maintain its utilization during 2015-2016. • Capital expenditures will decline modestly. • Debt leverage will decline faster under the group's more conservative financial leverage appetite.

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Company Description

Formosa Plastics Corp. (FPC) is one of the four core members of the Formosa Plastics (FP) group, which is Taiwan's largest private-sector industrial conglomerate in terms of assets. The operations of the four core companies--FPC, Nan Ya Plastics Corp. (NYPC), Formosa Chemicals & Fibre Corp. (FCFC), and Formosa Petrochemical Corp. (FPCC) are vertically integrated, ranging from oil refining and naphtha cracking to plastics and polyesters (see table 1). The highly integrated Mailiao complex provides the group's members with a stable supply of base chemical feedstock.

Table 1 Business Outline

Company Main products Formosa Plastics Vinyl chloride, polyvinylchloride (PVC), caustic soda, polyethylene (PE), polypropylene (PP), ethylene vinyl acetate Corp. (EVA), acrylic fiber, acrylic esters, acrylonitrile (AN), methyl methacrylate (MMA), epichlorohydrin (ECH), methyl tert-butyl ether (MTBE), carbon fiber, super absorbent polymer (SAP). Nan Ya Plastics Corp. Secondary plastics, polyesters, printed circuit board/electronic materials, ethylene glycol (EG), 1,4-butanediol (1,4BG) and other alcohols, curing agents, anti-oxidants and modifiers, Bisphenol A (BPA), Phthalic Anhydride (PA), Plasticizer, epoxidized soybean oil (ESO), 2-Ethylhexanol (2EH), Hydrogen Peroxide, engineering. Formosa Chemicals & Aromatics and derivatives- benzene, ortho-xylene (OX), para-xylene (PX); phenol, acetone, styrene monomer (SM), Fibre Corp. purified terephthalic acid (PTA), polymers- acrylonitrile-butadiene-styrene (ABS) resins, polystyrene (PS), polypropylene (PP), and polycarbonate (PC); textile & fiber, electricity generation. Formosa Oil refining, olefin, electricity generation. Petrochemical Corp.

Business Risk: Satisfactory

The FP group's business risk profile reflects our view that the group's dominant market position in Taiwan's commodity chemical market, good product diversity and strong scale economy, together with highly vertically integrated operations will continue to support the group's strong competitive position and satisfactory profitability. The group's asset concentration and continued oversupply in the region's chemical market partly offset these strengths.

We expect the four core companies' lowered ownership in Vietnam-based Formosa Ha Tinh Steel Corp. to significantly reduce the group's business and financial risks associated with the steel mill project following China Steel Corp.'s and JFE Steel Corp.'s participation in the project. The project cost about US$10.5 billion. We believe the project carries higher country risk and high execution risk given that the group has limited experience in the steel industry. In addition, the steel industry in Asia could continue to experience overcapacity for the next two to three years, despite an undersupplied market in ASEAN countries.

We do not expect the FP group to inject capital into its dynamic random access memory (DRAM) investments (Nanya Technology Corp. and Inotera Memories Inc.) over the next few years following a significant restructuring in its DRAM business. Nanya Technology's exit from the PC DRAM market, Inotera's dedication to the manufacturing of higher value-added products for U.S.-based Micron Technology Inc., and a recent improvement in the global DRAM market have sharply strengthened the two companies' performance in the past few quarters.

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We believe that the FP group's asset concentration risk will remain unchanged over the next few years. The Mai-Liao complex generates more than 70% of the group's revenue. Any significant disruption in the operations at the site would significantly affect the group's operating performance and cash flow, which was partly evidenced by the group's weaker performance in 2012. However, we believe significant investments in safety enhancement in 2012-2013 and higher maintenance capital expenditures will substantially lower the site's operating risk over next two to three years.

We believe that the recent decline in the global crude oil prices will strengthen the cost structure of crude oil based chemical productions relative to competing coal-based chemicals, and also narrow the cost disadvantage against residual gas and shale gas based chemical productions over the next one to two years. In addition, lower input costs will increase product margins and will partly offset the continued negative effect of weak regional chemical demand amid slowing GDP growth in China, in our view. We also expect lower oil prices to stimulate higher consumption of petroleum products and support FPCC's refining margin over the next one two years.

S&P Base-Case Operating Scenario

Our base-case scenario for the FP group indicates a mid double-digit percentage decline in 2015 and low-single-digit revenue growth in 2016 with an EBITDA margin of 15%-16% in 2015-2016. Our assumptions for the base-case scenario are:

• Projected growth in China's GDP of 6.8% in 2015 and 6.3% in 2016, and growth in Taiwan's GDP of 1.5% in 2015 and 2.2% in 2016. • Standard & Poor's Brent crude oil assumption averaging US$50/barrel for the rest of 2015 and US$55/barrel in 2016. • Demand growth and product pricing of major commodity chemicals to remain soft in 2015-2016, mainly because of lower crude oil prices and slower GDP growth in China. However, we expect product spreads for crude oil based chemical products to widen, supported by lower input costs and stronger demand for petroleum products stimulated by lower oil prices. • FPCC's refining utilization rate will remain above 90% in 2015-2016 compared with 90% in 2014, 85% in 2013, and 90% in 2014-2015; while the olefin run rate should improve to 96% in 2015-2016 from about 94.5% in 2014.

Peer comparison Table 2 Formosa Plastics Group -- Peer Comparison

Formosa Plastics Reliance Industries PTT Global Chemical Public Group Ltd. Co. Ltd. LG Chem Ltd. (Mil. $) --Average of past three fiscal years-- Revenues 45,987.7 68,566.3 17,609.7 21,519.4 EBITDA 3,710.6 6,012.7 1,459.8 2,500.6 Funds from operations (FFO) 3,456.8 5,538.6 1,260.3 2,138.4 Net income from cont. oper. 1,891.1 3,789.9 861.7 1,134.6 Cash flow from operations 3,146.3 6,679.0 1,449.6 1,844.5 Capital expenditures 2,312.7 8,608.3 465.0 1,453.8 Free operating cash flow 833.6 (1,929.3) 984.6 390.7

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Table 2 Formosa Plastics Group -- Peer Comparison (cont.) Discretionary cash flow (593.7) (2,458.3) 522.2 102.3 Cash and short-term investments 868.6 1,277.6 396.7 394.5 Debt 20,084.7 11,724.8 2,868.0 1,649.0 Equity 23,975.0 33,959.8 7,542.1 10,835.4

Adjusted ratios EBITDA margin (%) 8.1 8.8 8.3 11.6 Return on capital (%) 5.7 12.1 9.9 13.2 EBITDA interest coverage (x) 11.0 6.9 7.9 27.7 FFO cash interest coverage (X) 11.1 6.9 7.6 21.2 Debt/EBITDA (x) 5.4 2.0 2.0 0.7 FFO/debt (%) 17.2 47.2 43.9 129.7 Cash flow from operations/debt 15.7 57.0 50.5 111.9 (%) Free operating cash flow/debt (%) 4.2 (16.5) 34.3 23.7 Discretionary cash flow/debt (%) (3.0) (21.0) 18.2 6.2

Financial Risk: Intermediate

We expect the FP group to continue to lower its debt through its operating cash flows, the repayments of intercompany loans from its affiliate companies and the reduction in its debt guarantee for Formosa Ha Tinh Steel. In addition, we expect the group to generate stronger free operating cash flows with low capital expenditure and strengthening profitability because of lower input costs. We expect the group to increase its cash dividend payout ratio to 80%-90% in 2016, up from about 60% in 2015 after significantly reducing its debts. Accordingly, we expect the FP group to increase its ratio of FFO to debt to 30%-40% in 2015-2016 from 16.3% in 2014. In addition, we expect the group to sustain its EBITDA cash interest coverage above 20x in 2015-2016.

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S&P Base-Case Cash Flow And Capital Structure Scenario

Our base-case suggests:

• The four core companies will receive repayments of (NT$) 57 billion in advanced payments for Formosa Ha Tinh Steel's equipment procurement and its guarantee on Formosa Group (Cayman) Ltd. will decrease by NT$45 billion in 2015-2016 after the refinancing of Formosa Ha Tinh's bank loans. • The four core companies will receive repayments of NT$9.5 billion in intercompany loans in 2015 from Nanya Technology. • Capital expenditures will decrease to NT$26 billion-NT$32 billion each year in 2015 and 2016, but will increase to about NT$44 billion each year in 2017-2018 for the group's expansion in the U.S. No additional capital injections into Formosa Ha Tinh Steel in our projection period. • No change in the group's cash conversion cycle in 2015-2016, with a consistent working capital management policy. • Cash dividend payout ratio will increase to 80%-90% of net income in 2016 while the average tax rate in 2015-2016 will remain similar to that in 2014.

Financial summary Table 3 Formosa Plastics Group -- Financial Summary

Industry Sector: Commodity Chemicals --Fiscal year ended Dec. 31--

(Mil. NT$) 2014 2013 2012 2011 2010 Revenues 1,439,399 1,449,370 1,276,292 1,292,664 1,224,474 EBITDA 97,602 141,753 95,887 193,328 238,531 Funds from operations (FFO) 93,522 126,242 92,599 186,283 224,408 Net income from continuing operations 66,962 78,354 27,100 99,797 148,381 Cash flow from operations 90,696 110,712 83,236 123,797 172,753 Capital expenditures 38,757 97,568 71,089 55,420 43,746 Free operating cash flow 51,940 13,144 12,147 68,377 129,007 Discretionary cash flow 5,036 (676) (55,731) (60,810) 53,306 Cash and short-term investments 42,123 18,359 19,149 20,719 20,115 Debt 574,369 627,715 612,438 513,890 428,429 Equity 816,512 725,995 633,416 680,671 706,558

Adjusted ratios EBITDA margin (%) 6.8 9.8 7.5 15.0 19.5 Return on capital (%) 5.9 8.0 3.4 11.1 15.7 EBITDA interest coverage (x) 9.8 14.1 9.1 22.3 28.0 FFO cash interest coverage (x) 10.2 13.2 9.9 24.0 27.1 Debt/EBITDA (x) 5.9 4.4 6.4 2.7 1.8 FFO/debt (%) 16.3 20.1 15.1 36.2 52.4 Cash flow from operations/debt (%) 15.8 17.6 13.6 24.1 40.3 Free operating cash flow/debt (%) 9.0 2.1 2.0 13.3 30.1

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Table 3 Formosa Plastics Group -- Financial Summary (cont.) Discretionary cash flow/debt (%) 0.9 (0.1) (9.1) (11.8) 12.4

NT$--New Taiwan dollar.

Liquidity: Adequate

We believe that the FP group has "adequate" liquidity to meet its needs over the next 12 months based on our view that the group's ratio of liquidity sources to liquidity uses will be above 1.2x in 2015-2016. In addition, we believe that the group's sound banking relationships will support its financial flexibility, as evidenced by the fact that the group benefits from a very low credit spread. We also expect the FP group to easily meet the requirements of loose financial covenants on the group's current ratio, ratio of liability to equity, interest coverage and net worth.

Principal Liquidity Sources Principal Liquidity Uses

• Cash and short-term investments of NT$168.5 • Debt maturity in 2015 of about NT$186 billion. billion at the end of 2014. • Capital expenditure of about NT$32 billion in 2015. • FFO of about NT$141 billion in 2015. • Working capital inflow of about NT$62 billion, including repayments of intercompany loans.

Debt maturities Table 4 Formosa Plastics Group -- Debt Maturities

(Bil. NT$) Formosa Plastics Group upto June 30, 2016 185.69 7.2016-6.2017 76.69 7.2017-6.2018 59.59 7.2018-6.2019 46.19 7.2019-6.2020 40.84 Thereafter 76.28

NT$--New Taiwan dollar.

Other Credit Considerations

We assess the quality of the FP group's capital structure as positive which provides a one-notch uplift to the group credit profile because of the group's high holdings in other FP group member companies including the very profitable Formosa Plastics Corp. U.S.A (FPC USA; BBB+/Stable/--) and Taiwan-based Mai-Liao Power Corp., which can be liquidated in a reasonable time frame. As of March 31, 2015, the four core companies had about NT$343 billion in long-term investments, of which FPC USA and Mai-Liao Power generated NT$12.0 billion in equity income in 2014, while the group's other investments generated about NT$12.1 billion in 2014. All other modifiers have no impact on the ratings.

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Group Influence

The ratings on FPC, NYPC, FCFC and FPCC reflect their status as the core companies of the FP group. We believe that the four core members will support each other operationally and financially, based on our view of the impartibility of their business operations with highly integrated operations and centralized strategic planning and financial management, in addition to their common controlling shareholders. Accordingly, when analyzing the credit quality of the four core members, we view the individual operating units as a combined manufacturing entity. We consolidate the four operating units' financial statements to assess the group credit profile; accordingly, the long-term corporate credit ratings on all of these operating units have been equalized to the group credit profile of 'bbb+'.

Ratings Score Snapshot

Corporate Credit Rating BBB+/Stable/--

Business risk: Satisfactory • Country risk: Intermediate • Industry risk: Moderately high • Competitive position: Strong

Financial risk: Intermediate • Cash flow/Leverage: Intermediate

Anchor: bbb

Modifiers • Diversification/Portfolio effect: Neutral (no impact) • Capital structure: Positive (+1 notch) • Financial policy: Neutral (no impact) • Liquidity: Adequate (no impact) • Management and governance: Satisfactory (no impact) • Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile : bbb+

Reconciliation

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Table 5 Reconciliation Of Formosa Plastics Group Reported Amounts With Standard & Poor's Adjusted Amounts --Fiscal year ended Dec. 31, 2014--

Operating Interest Cash flow from Capital (Mil. NT$) Debt EBITDA income expense EBITDA operations expenditures Formosa Plastics 633,000.3 91,099.8 20,377.3 9,220.6 91,099.8 91,412.8 39,473.1 Group reported amounts

Standard & Poor's adjustments Interest expense ------(9,220.6) -- -- (reported) Interest income ------10,398.0 -- -- (reported) Current tax expense ------(4,541.7) -- -- (reported) Surplus cash (126,367.7) ------Capitalized interest ------716.4 (716.4) (716.4) (716.4) Dividends received -- 6,502.7 -- -- 6,502.7 -- -- from equity investments Non-operating income -- -- 61,765.8 ------(expense) Debt - Guarantees 67,736.8 ------Total adjustments (58,630.9) 6,502.7 61,765.8 716.4 2,422.0 (716.4) (716.4)

Interest Funds from Cash flow from Capital Debt EBITDA EBIT expense operations operations expenditures Standard & Poor's 574,369.3 97,602.5 82,143.1 9,937.0 93,521.8 90,696.4 38,756.7 adjusted amounts

NT$--New Taiwan dollar. Note: Data shown are taken from the company's financial statements but might include adjustments made by Standard & Poor's analysts.

Related Criteria And Research

Related Criteria • Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014 • National And Regional Scale Credit Ratings, Sept. 22, 2014 • Key Credit Factors For The Oil Refining And Marketing Industry, March 27, 2014 • Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 • Key Credit Factors For The Commodity Chemicals Industry, Dec. 31, 2013 • Methodology For Crude Oil And Natural Gas Price Assumptions For Corporates And Sovereigns, Nov. 19, 2013 • Group Rating Methodology, Nov. 19, 2013 • Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 • Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 • Corporate Methodology, Nov. 19, 2013 • Methodology: Industry Risk, Nov. 19, 2013 • Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012

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Business And Financial Risk Matrix

Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of October 29, 2015) Formosa Plastics Corp. Corporate Credit Rating BBB+/Stable/-- Greater China Regional Scale cnA+/--/-- Taiwan National Scale twAA-/Stable/twA-1+ Corporate Credit Ratings History 29-Oct-2014 Foreign Currency BBB+/Stable/-- 02-Aug-2011 BBB+/Negative/-- 06-May-2009 BBB+/Stable/-- 29-Oct-2014 Local Currency BBB+/Stable/-- 02-Aug-2011 BBB+/Negative/-- 30-Dec-2010 BBB+/Stable/-- 29-Apr-2011 Greater China Regional Scale cnA+/--/-- 28-Apr-2011 cnA+/Stable/-- 29-Oct-2014 Taiwan National Scale twAA-/Stable/twA-1+ 02-Aug-2011 twAA-/Negative/twA-1+ 06-May-2009 twAA-/Stable/twA-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

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