formosa plastics corp. fpc rating... · 2019-04-23 · full analysis: formosa plastics corp....

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Formosa Plastics Corp.

Full Analysis

November 20, 2018

Primary Credit Analyst

David Hsu

Taipei

+886-2-8722-5828

david.hsu

@spglobal.com

david.hsu

@taiwanratings.com.tw

Secondary Credit Analyst

Raymond Hsu, CFA

Taipei

+886-2-8722-5827

raymond.hsu

@taiwanratings.com.tw

raymond.hsu

@spglobal.com

Full Analysis: Formosa Plastics Corp.

November 20, 2018 rrs.taiwanratings.com.tw 2

Credit Highlights

Materially improved debt leverage. FP group has lowered its financial leverage mainly through

improved profitability and cash flow generation. This could sustain over the next two years and turn

into sufficient financial headroom to help the group absorb potential volatility in the petrochemical

market over a longer period. It could also fund the group's core and potential non-core investments as

well as its upcoming large investment in the U.S., while still keeping the group's ratio of funds from

operations (FFO) to debt consistently above 45% throughout business cycles.

Large investment plan in the U.S. The FP group is likely to increase its long-term capital expenditure

after 2019, to support significant expansion in the U.S. The group plans to build a shale gas-based

chemical complex in Louisiana, costing more than US$10 billion in two phases during 2019-2026. This

project along with constant expansion in Asia could increase the group's debt leverage; however, the

investment could also increase the group's geographical and feedstock diversity, enabling more stable

profitability in the longer term.

Improved profitability and cash flow generation could sustain. The group's profitability and cash flow

are likely to remain somewhat strong over the next one to two years supported by moderate

improvement in global demand, which should help reduce oversupply in the chemical industry. China's

tightening environmental standards have also helped to reduce inefficient capacity and partly alleviate

regional oversupply. Moreover, the group's efforts to enhance its product mix with more high value-

added products should help to withstand the negative effect of persistent oversupply for most

commodity chemicals in the region.

Potential risks from recent oil price volatility and the U.S.-Sino trade war. The group's low-cost

competitiveness underpinned by its vertical integration and economies of scale could partly offset the

impact from the recent rise in oil prices and raw material costs. It could also help to offset the impact

from narrowing product spreads, especially for the mid-to-downstream products. We also expect FP

group's limited direct trade exposure to China and the U.S., as well as multiple manufacturing bases at

home and in the U.S., to somewhat safeguard the group's operating performance in these regions.

However, we believe it will be difficult for the group to avoid the negative effect on manufacturing costs

and downstream demand from escalating U.S.-Sino trade friction.

Overview

Key Strengths Key Risks

Strong market position for various petrochemical products throughout the region.

Upcoming large investment plan in Louisiana, U.S.A. is likely to weaken financial leverage over the next two to three years.

Strong operating efficiency and good product diversity underpinned by a high degree of vertical integration.

Potential risk from non-core investments may require group support during economic downturns.

Reduced debt leverage due to improved profitability and lighter capital spending before the upcoming large U.S. investment.

Asset concentration risk from its largest single-site complex in Mai-Liao, Taiwan.

Good financial flexibility with sizable relatively liquid non-core assets.

Operates in the highly cyclical commodity chemical market.

Strong liquidity.

Contents

Credit

Highlights

Outlook

Our Base-Case

Scenario

Base-Case

Projections

Company

Description

Business Risk

Financial Risk

Liquidity

Group

Influence

Ratings Score

Snapshot

Reconciliation

Issue Ratings

Related

Criteria



Our Base-Case Scenario

Assumptions

Macroeconomic and industry related:

− Growth in chemical demand to remain highly correlated with GDP growth in Asia-Pacific.

− Moderate recovery in the global economy, particularly the U.S., still-strong GDP growth in China,

and the removal of excess capacity in China are likely to support growth and stability in regional

chemical markets.

− Global capacity expansion, especially in the U.S., is likely to materialize from the second half of

2018, which could pressure chemical spreads over next two to three years. However, growing

global demand could absorb capacity additions from gas-based production in the U.S. (assuming

80% utilization).

Business assumptions for the FP group:

− Revenue for the four core companies will increase by about 15% in 2018 because of higher

product prices and moderate improvement in demand. Revenue to decline by a mid-single-digit

in 2019-2020, given our expectation of falling crude oil prices.

− FPCC's refining utilization rate will remain high at 89%-92% in 2018-2019 compared with 87% in

2017 and a very high 92.5% in the first half of 2018; while the olefin run rate will remain at a high

95%-97% over the next two years compared with about 95% in 2017, supported by improved

operational stability in the group's Mai-liao complex.

− FP group will maintain its EBITDA margin at about 20% in 2018 and at 17%-18% over 2019-2020,

albeit down from 21.1% in 2017. Increasing sales from higher value-added products and more

efficient manufacturing processes should support the EBITDA margin and could partly offset the

impact from increasing supply and escalating trade tension.

Outlook: Stable

The stable rating outlook reflects our view that the Formosa Plastics (FP) group will maintain its

improved profitability and cash flow at a satisfactory level over the next two to three years, supporting

a ratio of funds from operations (FFO) to debt above 45%. The group's financial headroom should be

sufficient to absorb potential market volatility during the period, as well as its anticipated large outlay

at its shale gas-based chemical complex in the U.S. and other expansions over the next two to three

years.

Downside scenario

We may lower the long-term rating on the core group members if the FP group's ratio of FFO to debt

falls close to 45% for an extended period. Scenarios that could lead to this are: (1) market conditions

worsen substantially due to a much weaker regional economy than we originally forecast; or (2) the

group takes on more aggressive cash dividend payouts, capital expenditures, or other investments

substantially beyond our base case scenario.

Upside scenario

Industry volatility and geographic concentration constrain the ratings. We could raise the rating on

the core group members if the FP group can make material improvement in its business scale,

geographic diversity, and performance stability. The group could achieve this when its U.S.

investment results in a major contribution to consolidated revenue and profit. At the same time, the

group would need to maintain financial discipline, especially on cash dividend payments, debt

appetite, and growth strategy, to hold the ratio of FFO to debt above 45% on a sustainable basis.



Cash flow and leverage assumptions for the FP group:

− Capital expenditures plus investments will be moderately higher at New Taiwan dollar (NT$) 75

billion-NT$80 billion in 2018-2019. Expenditure on the Louisiana-based project will amount to

over US$10 billion from 2019, but the majority will occur in 2021-2023.

− The group's guarantee on its Vietnam-based steel mill project will decrease gradually from about

NT$140 billion as the end of June 2018 to about NT$120 billion in 2020, after future refinancing

activities.

− Cash dividend payout will remain at about 70% of the previous year's net income over the next

two years.

Key Metrics

FFO/Debt 67.1% 70%-75% 60%-65% 50%-55%

FOCF/Debt 46.7% 35%-40% 40%-45% 30%-35%

A--Actual. E--Estimate. FFO--Funds from operations. FOCF--Free operating cash flow.

Base-Case Projections Oil and chemical prices to weigh on FP group's revenue growth. FP group's revenue growth will largely

follow the trend for crude oil and chemical products prices, with lesser impact from the group's

continuous capacity expansion. Therefore, we expect its revenue to decline in 2019-2020, based on our

expectation of falling crude oil prices.

Debt leverage could weaken amid rising capital expenditures but should remain above our

downgrade trigger. The group's total capital expenditures and investments are likely to grow further

after 2020 mostly to support the Louisiana project, which could drag down the group's key financial

ratios. However, we expect the impact to be manageable and within our downside trigger, given FP

group's financial buffers and the likelihood that major spending will be spread-out.

Chart 1 | Download Chart Data

Formosa Plastics Group -- FFO/Debt And Capital Expenditure Trend

NT$--New Taiwan dollar. FFO--Funds from operations. E--Estimate. Source: Taiwan Ratings' forecasts. Copyright © by Taiwan

Ratings Corp. All rights reserved.

Capital expenditure + long-term investment (left scale)

FFO/Debt (right scale)

https://rrs.taiwanratings.com.tw/portal/member/viewFinancialSummary/689?lang=en



Company Description

FP group is Taiwan's largest private-sector industrial conglomerate in terms of assets. We assess four

companies as holding core status within the group--Formosa Plastics Corp. (FPC), Nan Ya Plastics

Corp. (NYPC), Formosa Chemicals & Fibre Corp. (FCFC), and Formosa Petrochemical Corp. (FPCC)--

whose operations are vertically integrated and range from oil refining and naphtha cracking to plastics

and polyesters (see table 1 and chart 1). The group's highly integrated Mai-Liao complex provides the

group's members with a stable supply of base chemical feedstock.

Table 1

Formosa Plastics Group -- Product Breakdown

Company Main products

Formosa Plastics Corp. Vinyl chloride, polyvinylchloride (PVC), caustic soda, polyethylene (PE), polypropylene (PP), ethylene vinyl acetate (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 & Fibre Corp. Aromatics and derivatives- benzene, ortho-xylene (OX), para-xylene (PX); phenol, acetone, styrene monomer (SM), purified terephthalic acid (PTA), polymers- acrylonitrile-butadiene-styrene (ABS) resins, polystyrene (PS), polypropylene (PP), and polycarbonate (PC); textile & fiber, electricity generation.

Formosa Petrochemical Corp. Oil refining, olefin, electricity generation.

Copyright © by Taiwan Ratings Corp. All rights reserved.

Chart 2 | Download Chart Data

Formosa Plastics Group -- Revenue Breakdown By Company In 2017

Source: Company data. Copyright © by Taiwan Ratings Corp. All rights reserved.

https://rrs.taiwanratings.com.tw/portal/member/viewMemberProfile/3164












Business Risk

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, and highly

vertically integrated operations will continue to support a strong competitive position and satisfactory

profitability.

The group's profitability and cash flow are likely to remain relatively strong, given moderate

improvement in global demand and the group's efforts to improve product mix with more high value-

added products. However, material industry risks, including oil price volatility, continuing oversupply

for most commodity chemicals in the region, and downside risks to China's economy due to escalating

trade tension could weaken the group's profitability and cash flow over the next two to three years.

FP group's asset concentration risk is likely to remain over the next few years, given the single site Mai-

Liao complex generates more than 70% of the group's revenue. Any significant disruption in the

operations at the site would greatly affect the group's operating performance and cash flow. However,

significant investments in safety enhancements and higher capital expenditure on maintenance needs

should continue to support the complex's stable performance over the next two years. In addition, the

Louisiana project could also help the group to lower its asset concentration risk in the longer term.

We expect the four core companies to remain exposed to loan guarantees on the Vietnam steel mill,

albeit at a potentially lower level, and no higher than 49.575% ownership. Nonetheless, we believe the

project will continue to post additional risk for the group because it carries higher country risk and high

execution risk due to the group's limited experience in the steel industry despite an improving and

undersupplied market in ASEAN countries.

Financial Risk

FP group's reduced debt leverage and sustainable profitability should provide sufficient headroom to

support planned expansion projects without material impact on the group's credit metrics. A gradual

shift in loan guarantees on the Vietnam steel mill from core units to non-FP group shareholders could

also help reduce the group's financial leverage over the next few years.

In addition, the group is likely to take measures, such as a reduction in cash dividends, during the

period of high capital expenditure, to maintain modest debt leverage if the industry faces a downturn.

We expect the group's FFO to range from NT$180 billion-NT$200 billion annually in 2019-2020, helping

the group maintain a strong ratio of FFO to debt at 60%-70% in 2018-2019 and above 45% during the

next capital expenditure cycle.

We also believe the group's financial flexibility will strengthen its 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) and Taiwan-based Mai-Liao Power Corp. (not included in our consolidated

analysis of the four core companies), which can be liquidated in a reasonable time frame. As of the end

of 2017, the four core companies had about NT$353 billion in long-term investments, of which FPC

USA and Mai-Liao Power generated NT$6.3 billion in equity income in 2017, while the group's other

investments generated about NT$13.5 billion in 2017.



Table 2 | Download

Formosa Plastics Corp. Group -- Financial Summary (Year ended December 31)

(Mil. NT$) 2017 2016 2015 2014 2013

Revenues 1,186,864 1,058,828 1,139,093 1,439,399 1,449,370

EBITDA 250,337 227,635 173,458 97,602 141,753

Funds from operations (FFO) 231,790 214,434 160,856 93,522 126,242

Net income from continuing operations

182,780 156,515 110,015 66,962 78,354

Cash flow from operations 198,066 181,503 271,921 90,696 110,712

Capital expenditures 36,761 26,906 38,704 33,933 45,387

Free operating cash flow 161,304 154,596 233,218 56,764 65,324

Discretionary cash flow 45,312 74,954 197,410 9,860 51,505

Cash and short-term investments 260,530 265,450 227,726 168,490 73,435

Debt 345,670 466,640 508,661 574,369 627,715

Equity 994,899 900,944 839,961 816,512 725,995

Adjusted ratios

EBITDA margin (%) 21.1 21.5 15.2 6.8 9.8

Return on capital (%) 16.4 13.9 10.0 5.9 8.0

EBITDA interest coverage (x) 36.4 32.2 20.2 9.8 14.1

FFO cash interest coverage (x) 34.1 26.2 17.8 10.2 13.2

Debt/EBITDA (x) 1.4 2.0 2.9 5.9 4.4

FFO/debt (%) 67.1 46.0 31.6 16.3 20.1

Cash flow from operations/debt (%) 57.3 38.9 53.5 15.8 17.6

Free operating cash flow/debt (%) 46.7 33.1 45.8 9.9 10.4

Discretionary cash flow/debt (%) 13.1 16.1 38.8 1.7 8.2

NT$--New Taiwan dollar. Note: Data shown are taken from the company's financial statements but might include adjustments made by Taiwan Ratings' analysts. Copyright © by Taiwan Ratings Corp. All rights reserved.




Liquidity: Strong

The short-term rating is 'twA-1+'. We believe the FP group has strong liquidity to meet its needs over

the next 24 months with a ratio of liquidity sources to liquidity uses at 1.6x-1.7x. The group is likely to

maintain positive liquidity sources less uses, even if forecast EBITDA declines by 30%. We also believe

the group's solid banking relationships and strong credit standing will support its financial flexibility,

as evidenced by its very low credit spread and large amount of undrawn credit lines. Furthermore, FP

group's strong performance should easily meet the requirements of loose financial covenants over the

next two years, in our view.

Group Influence

The ratings on FPC, NYP, FCFC and FPCC reflect their status as the core companies of the FP group. We

believe the core members will support each other operationally and financially due to 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, we have equalized the long-term issuer credit ratings on

all of these operating units to the group credit profile of 'twaa'.

Ratings Score Snapshot

Principal Liquidity Sources

− Cash and short-term investments of NT$278 billion at the end of June 2018.

− FFO of NT$190 billion-NT$220 billion per year in 2018-2019.

− Undrawn long-term credit facilities of NT$146 billion at the end of June 2018.

Principal Liquidity Uses

− Debt maturity plus short-term debt repayment for about NT$141 billion up to June 2019.

− Capital expenditures plus long-term investments of about NT$78 billion in 2018 and NT$88 billion

in 2019.

− Cash dividend payout for about 70% of the previous year's net income.

Issuer Credit Rating: twAA/Stable/twA-1+

Note: The descriptors below are on a global scale.

Business Risk: Satisfactory

Modifiers:

− Diversification/Portfolio effect: Neutral (no impact)

− Capital structure: Positive (+1 notch)

− Financial policy: Neutral (no impact)

− Liquidity: Strong (no impact)

− Management and governance: Satisfactory (no impact)

− Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: The core operating units of

the FP group have not been assigned an SACP

− Group credit profile: twaa

− Entity status within group: Core

− Country risk: Intermediate

− Industry risk: Moderately high

− Competitive position: Strong

Financial Risk: Modest

− Cash flow/Leverage: Modest

Anchor: twaa-



Reconciliation

Table 3 | Download

Reconciliation Of Formosa Plastics Corp. Group Reported Amounts With Taiwan Ratings' Adjusted Amounts (Year ended Dec. 31, 2017)

(Mil. NT$) Debt EBITDA Operating income

Interest expense

EBITDA Cash flow from operations

Capital expenditures

Formosa Plastics Corp. reported amounts

361,429.2 245,598.1 182,359.3 6,703.2 245,598.1 194,926.1 36,943.7

Taiwan Ratings' adjustments

Interest expense (reported) -- -- -- -- (6,703.2) -- --

Interest income (reported) -- -- -- -- 20,849.5 -- --

Current tax expense (reported) -- -- -- -- (32,511.5) -- --

Surplus cash (195,397.6) -- -- -- -- -- --

Capitalized interest -- -- -- 182.3 (182.3) (182.3) (182.3)

Dividends received from equity investments

-- 4,739.2 -- -- 4,739.2 -- --

Non-operating income (expense) -- -- 44,036.8 -- -- -- --

Debt - Guarantees 179,638.4 -- -- -- -- -- --

OCF - Other -- -- -- -- -- 3,321.7 --

Total adjustments (15,759.2) 4,739.2 44,036.8 182.3 (13,808.2) 3,139.4 (182.3)

Debt EBITDA EBIT Interest expense

Funds from operations

Cash flow from operations

Capital expenditures

Taiwan Ratings' adjusted amounts

345,670 250,337 226,396 6,885 231,790 198,066 36,761

NT$--New Taiwan dollar. Note: Data shown are taken from the company's financial statements but might include adjustments made by Taiwan Ratings' analysts. Copyright © by Taiwan Ratings Corp. All rights reserved.




Issue Ratings

Capital structure

Formosa Plastics Corp.'s capital structure comprises NT$8 billion secured debt, NT$109 billion

unsecured debt at the parent level, and NT$17.1 billion unsecured debt issued by the company's

subsidiaries as of the end of 2017. The unsecured debt at the parent level includes guaranteed debt to

other related entities.

Nan Ya Plastics Corp.'s capital structure comprises NT$4.8 billion secured debt, NT$137.5 billion

unsecured debt at the parent level, and NT$12.9 billion unsecured debt issued by the company's



Formosa Chemicals & Fibre Corp.'s capital structure comprises NT$9.8 billion secured debt, NT$141.3

billion unsecured debt at the parent level, and NT$43.6 billion unsecured debt issued by the company's



Formosa Petrochemical Corp.'s capital structure comprises NT$10.4 billion secured debt, and NT$74.8

billion unsecured debt as of the end of June 2017. The unsecured debt at the parent level includes

guaranteed debt to other related entities.

Analytical conclusions

Our senior unsecured issue-level ratings on the companies' bonds are equated with our 'twAA' issuer

credit ratings on the four core companies. This is because the companies' debt leverage is low and we

assess the financial risk profiles as modest, suggesting low subordination risk to senior unsecured

debt holders.

Related Criteria − Criteria - Corporates – General: Reflecting Subordination Risk In Corporate Issue Ratings – March

28, 2018

− General Criteria: Guarantee Criteria - October 21, 2016

− Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global

Corporate Issuers - December 16, 2014

− Criteria - Corporates - Industrials: Key Credit Factors For The Oil Refining And Marketing Industry

- March 27, 2014

− Criteria - Corporates - Industrials: Key Credit Factors For The Commodity Chemicals Industry -

December 31, 2013

− Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments - November 19,

2013

− General Criteria: Methodology: Industry Risk - November 19, 2013

− Criteria - Corporates - General: Corporate Methodology - November 19, 2013

− General Criteria: Methodology: Management And Governance Credit Factors For Corporate

Entities And Insurers - November 13, 2012

− General Criteria: Country Risk Assessment Methodology And Assumptions - November 19, 2013

− General Criteria: Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of

'D' And 'SD' Ratings - October 24, 2013

− General Criteria: National And Regional Scale Credit Ratings - September 22, 2014

− General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009

− General Criteria: Group Rating Methodology - November 19, 2013

− Understanding Taiwan Ratings' Rating Definitions, www.taiwanratings.com - June 26, 2018

(Unless otherwise stated, these articles are published on www.standardandpoors.com, access to which requires a registered account)



Ratings Detail (As of November 20, 2018)

TRC Current Ratings Issuer Credit Rating twAA/Stable/twA-1+

Issuer Credit Rating History

2018/10/15

2017/10/17

2014/10/29

twAA/Stable/twA-1+

twAA-/Positive/twA-1+

twAA-/Stable/twA-1+



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formosa plastics corp. fpc rating... · 2019-04-23 · full analysis: formosa plastics corp....

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