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Formosa Plastics Corp Formosa Plastics Corp. Primary Credit Analyst: Apple Lo, Hong Kong (852) 2533-3542; [email protected] Secondary Contact: Raymond Hsu, CFA, Taipei (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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 29, 2015 1 1472237 | 302312798 Formosa Plastics Corp. 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 China Regional Scale Taiwan 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 29, 2015 2 1472237 | 302312798 Formosa Plastics Corp. 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 29, 2015 3 1472237 | 302312798 Formosa Plastics Corp. 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 Formosa Plastics Group 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 29, 2015 4 1472237 | 302312798 Formosa Plastics Corp. 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.
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