A Standard & Poor's Ratings Partner
Rating
Research
Services
………..
Formosa
Plastics
Corp.
Primary Credit Analyst:
Raymond Hsu, CFA; (886) 2 8722‐5827; [email protected]
Secondary Contact:
David Hsu; (886) 2 8722‐5828; [email protected]
Table
Of
Contents
………
Rationale
Outlook
Taiwan Ratings' Base‐Case Scenario
Company Description
Analytical Approach
Business Risk
Financial Risk
Liquidity
Reconciliation
Related Criteria And Research
Formosa
Plastics
Corp.
Corporate Credit Rating twAA‐/Negative/twA‐1+
Profile Assessments
Global Obligor Comparison Local Obligor Comparison
BUSINESS RISK Satisfactory Strong
FINANCIAL RISK Intermediate Modest
Rationale
Business Risk: Strong Financial Risk: Modest
Strong operating efficiency and product diversity.
Strong domestic market position in the petrochemical and oil refining industries. High‐risk non‐core investments.
Asset concentration.
Weak credit metrics for the current rating. Improving cash flow protection due to
improving profitability and debt reduction efforts.
Commitment on non‐debt financing and reduction of ownership in Formosa Ha
Tinh Steel Corp. Adequate liquidity.
Outlook: Negative
The negative outlook reflects our assessment of material risk that the Formosa Plastics group's (FP group) cash flow protection may not improve as we expect if the group fails to execute its strategy to enhance its cash flow protection measures on a timely basis or the petrochemical market weakens again due to a weak China economy.
Downside scenario
We may lower the ratings if the FP group fails to improve its adjusted ratio of consolidated funds from operations (FFO) to debt above 30% in 2014. This would likely be the result of: (1) the FP group fails to complete its planned sale of shares in FPCC in 2014; or (2) the four core companies fail to reduce ownership in Formosa Ha Tinh Steel below 50% in 2014; or (3) the market worsens again.
Upside scenario
We may revise the outlook back to stable if the FP group successfully reduces its ownership, completes its planned sale of shares in Formosa Petrochemical Corp., and improves its ratio of FFO to debt to a level sustainably above 30%.
Taiwan
Ratings'
Base
‐
Case
Scenario
Assumptions Key Metrics
The FP group's revenue growth of 5%‐8% year
on year in 2013 and 0%‐2% in 2014.
EBITDA margin to improve in the range 10%‐
12% in 2013 and 2014.
Capital expenditures in the range New Taiwan
dollar (NT$) 25 billion‐NT$35 billion annually in
2013 and 2014.
Cash dividend payout ratio of 50%‐60% and
average tax rate of about 13%‐15% in 2013 and
2014.
2012A 2013E 2014E
EBITDA Margin 7.4% 10.0%‐ 11.0% 11.0%‐ 12.0% Debt/EBITDA 7.1x 4.0x‐ 4.5x 3.0x‐ 3.5x FFO/Debt 15.3% 20.0%‐ 25.0% 28.0%‐ 32.0% Debt/Capital 51.6% 47‐49% 39‐42%
A‐‐Actual; E‐‐Estimate; Data represent the pro‐forma
consolidation of the four core companies.
Company
Description
Formosa Plastics Corp. (FPC) is one of the four core members of the Formosa Plastics group (FP group), which is Taiwan's largest private‐sector industrial conglomerate in terms of assets and revenues. The other three core companies are Nan Ya Plastics Corp. (NYPC), Formosa
Chemicals & Fibre Corp. (FCFC) and Formosa Petrochemical Corp. (FPCC). The four core companies' operations 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. In 2012, revenue for FPC, NYPC, FCFC and FPCC was NT$197 billion, NT$301 billion, NT$330 billion and NT$893 billion, respectively.
Table 1
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.
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
Analytical
Approach
The ratings on Taiwan‐based Formosa Plastics Corp. reflect the company's status as a core member of the FP group. When analyzing the credit quality of the four core members, Taiwan Ratings Corp. views the individual operating units as a combined manufacturing entity with highly integrated operations. We consolidate the four operating units' financial statements to give a clear picture of the group's overall cash flow generation and debt; accordingly, the long‐ term corporate credit ratings on all of these operating units have been equalized.
Business
Risk:
Strong
We expect the FP group's scaled productions and highly integrated operations to continue to support its strong cost competitiveness and operating efficiency, as well as product diversity. We also expect the group to maintain its strong market positions for these products. The group's significant economies of scale and good product diversity should enable it to maintain above‐average and stable profit margins relative to those of its peers.
We expect the group's plan to reduce the four core companies' ownership in Formosa Ha Tinh Steel Corp., if executed, to significantly reduce the group's business and financial risks associated with the steel mill project in Vietnam, which cost about US$10 billion. We believe the project carries higher country risk and high execution risk given that the group is short of experience in the steel industry. In addition, the steel industry in Asia may continue to experience overcapacity for the next two to three years, despite an undersupplied market in the ASEAN countries.
We do not expect the FP group to conduct large equity injections into its dynamic random access memory (DRAM) investments over the next few years following a significant restructuring in its DRAM business. Nanya Technology Corp. terminated its technology co‐ development with Micron Technology Inc. and exited the PC DRAM market in early 2013 while at the same time withdrawing its capacity demand from Inotera Memory Inc. Inotera now focuses on the manufacturing of higher value‐added products for Micron. As a result, Nanya Technology and Inotera generated profits of NT$4.2 billion and NT$10.1 billion, respectively, in the first nine months of 2013 amid improving market conditions, compared with losses of NT$27.1 billion and NT$11.8 billion, respectively, for the same period in 2012.
We believe that the FP group's asset concentration risk will remain over the next few years. The Mai‐Liao complex generated more than 70% of the group's revenue. Any significant disruption in the operations at the site will 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.
TRC Base‐Case Operating Scenario
Taiwan Ratings' base‐case scenario for the FP group indicates low to mid‐single‐digit revenue growth with
a gradual improvement in its EBITDA margin in 2013 and 2014. Our assumptions for the base‐case scenario
are:
The refining utilization rate will improve to 86% in 2013 and 2014 from about 80% in 2012; while the
olefin run rate will improve to 92.5% from about 80% in 2012.
Revenue will grow 5%‐8% in 2013 and 0%‐2% in 2014 due to improving capacity utilization and better
pricing for aromatics and some olefins.
EBITDA margin will be 10%‐12% in 2013 and 2014, compared with 7.4% in 2012.
Financial
Risk:
Modest
We expect the FP group's financial metrics to remain relatively weak in 2013 due to continued equity investments in the steel mill project in Vietnam, and only slowly improving profitability. However, our base‐case scenario expects the four core companies to improve their credit metrics to be consistent with the rating in 2014, due to further improvement in their profitability and the disposal of shares in FPCC, despite the group's planned guarantee on Formosa Ha Tinh Steel's debt. The group's ratio of funds from operations (FFO) to debt weakened significantly to 15% in 2012 from 36% in 2011, but we expect the ratio to improve to the range of 20%‐25% in 2013 and 28%‐32% in 2014.
We also expect the group to be more conservative in its cash flow management, including its cash dividend payments, to weather the industry downturn and meet capital expenditure needs. The FP group lowered its cash dividend payout ratio below 60% in 2012 from over 80% previously. In addition, we expect the four core companies' large long‐term investments not consolidated in our analysis of the four core companies, to provide additional financial flexibility. These investments include the highly profitable 23%‐owned Formosa Plastics Corp. USA and wholly owned Mai‐Liao Power Corp., which contributed about NT$13 billion in equity income to the four core companies in 2012.
TRC Base‐Case Cash‐Flow And Capital Structure Scenario
Our base case suggests:
The FP group's capital expenditures of NT$25 billion‐NT$35 billion in 2013 and 2014.
About NT$53 billion in equity injections for Formosa Ha Tinh Steel and iron ore mine acquisition in
2013 and none in 2014.
Guarantee on Formosa Ha Tinh Steel's debt of about US$3 billion in 2014 and 2015.
The completion of the FP group's first tranche disposal of shares in FPCC in 2014.
Largely unchanged in the FP group's cash conversion cycle in 2013 and 2014.
Cash dividend payout ratio will be about 50%‐60% and an average tax rate of about 13%‐15% in 2013 and
2014.
Financial summary
Liquidity:
Adequate
The short‐term rating is 'twA‐1+'. We believe that the FP group has "adequate" liquidity to meet its needs over the next two years. This view incorporates the following major assumptions:
The ratio of liquidity sources (including cash, liquid financial assets, funds from
Table 2
Formosa Plastics Corp. Financial Summary Industry Sector: commodity chemicals
(Mil. NT$) 2012 2011 2010 2009 2008
Revenues 196,879.0 217,037.0 225,320.0 180,075.0 200,178.0
EBITDA 15,055.5 37,568.0 43,193.0 26,735.0 18,908.0
Net income from continuing
operations 14,662.5 35,724.0 45,546.0 27,533.0 19,709.0
Funds from operations (FFO) 23,330.2 54,682.0 55,546.0 28,552.0 45,746.0
Capital expenditures 12,352.8 6,746.0 4,454.0 3,202.0 7,115.0
Free operating cash flow 11,811.5 38,151.0 49,861.0 32,790.0 30,190.0
Discretionary cash flow (12,644.7) (3,423.0) 25,097.0 22,798.0 (8,278.0)
Cash and short-term investments 68,658.0 70,081.0 89,377.0 68,024.0 38,250.0
Debt 106,993.9 82,458.4 66,880.0 81,900.0 98,926.0
Equity 226,620.5 241,255.6 260,844.0 225,330.0 180,205.0
Adjusted ratios
EBITDA margin (%) 7.6 17.3 19.2 14.8 9.4
EBITDA interest coverage (x) 10.8 28.8 32.1 15.0 6.8
EBIT interest coverage (x) 13.0 32.4 39.3 17.5 7.3
Return on capital (%) 5.5 13.0 16.7 10.7 6.6
FFO/debt (%) 21.8 66.3 83.1 34.9 46.2
Free operating cash flow/debt
(%) 11.0 46.3 74.6 40.0 30.5
Debt/EBITDA (x) 7.1 2.2 1.5 3.1 5.2
Debt/debt and equity (%) 32.1 25.5 20.4 26.7 35.4
--Fiscal year ended Dec.
31--NT$--New Taiwan dollar. Note: data are fully adjusted.
Table 3
Formosa Plastics Group Financial Summary Industry Sector: commodity chemicals
(Mil. NT$) 2012 2011 2010 2009 2008
Revenues 1,276,292.2 1,292,664.3 1,224,474.0 988,459.0 1,228,163.0
EBITDA 94,614.2 187,729.0 232,149.0 181,654.0 133,571.0
Net income from continuing
operations 27,100.0 99,796.9 148,380.9 88,010.5 41,599.5
Funds from operations (FFO) 102,347.0 208,115.4 237,779.9 161,144.2 128,240.1
Capital expenditures 71,089.0 55,420.0 43,746.0 30,022.0 52,553.0
Free operating cash flow 28,290.0 102,971.4 163,642.9 117,694.2 101,375.1
Discretionary cash flow (39,587.7) (26,215.0) 87,942.0 92,951.0 (40,862.0)
Cash and short-term investments 246,151.4 265,264.0 305,287.0 202,844.0 136,310.0
Debt 669,884.3 576,046.9 488,773.0 524,249.0 594,972.0
Equity 802,972.4 863,059.9 931,387.1 814,414.0 676,049.7
Adjusted ratios
EBITDA margin (%) 7.4 14.5 19.0 18.4 10.9
EBITDA interest coverage (x) 9.0 21.7 27.3 16.5 7.6
EBIT interest coverage (x) 4.0 15.0 21.1 9.6 3.1
Return on capital (%) 2.9 9.1 13.0 8.1 4.1
FFO/debt (%) 15.3 36.1 48.6 30.7 21.6
Free operating cash flow/debt
(%) 4.2 17.9 33.5 22.5 17.0
Debt/EBITDA (x) 7.1 3.1 2.1 2.9 4.5
Debt/debt and equity (%) 45.5 40.0 34.4 39.2 46.8
--Fiscal year ended Dec.
31--NT$--New Taiwan dollar. Note: pro-forma consolidation of Formosa Plastics Corp., Nan Ya Plastics Corp., Formosa Chemicals & Fibre Corp. and Formosa Petrochemical Corp.
dividends, working capital needs, and debt maturities) will be below 1.5x over the next 12 months.
The group could absorb, with limited refinancing, high‐impact, low‐probability events. Liquidity sources will continue to exceed uses, even if the group's EBITDA were to
decline by 15%.
The group's sound banking relationships support its financial flexibility. In addition, the group benefits from a very low credit spread due to its sizeable domestic corporate bond issuance.
The group has prudent financial management.
Principal Liquidity Sources Principal Liquidity Uses
Cash and short‐term investment of about
NT$71.8 billion as of the end of 2013 and 2014.
Short‐term investment excludes cross shares
holdings among the four core companies.
FFO of about NT$145 billion in 2013 and
NT$160 billion in 2014.
About NT$9 billion from working capital
movements in both 2013 and 2014.
Capital expenditures exceeding NT$25‐35 billion
in 2013 and 2014.
50% of debt maturity in one year amounting to
NT$106 billion in 2013.
Cash dividends are about 50%‐60% of net income
in 2013 and 2014.
Reconciliation
Related
Criteria
And
Research
Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
Table 4
--Fiscal year ended Dec. 31,
2012--(Mil. NT$) Operating income Interest expense Cash flow from operations Cash flow from operations Capital expenditures
Formosa Plastics Corp.
reported amounts 5,323.1 1,325.4 24,236.1 24,236.1 12,424.6 Taiwan Ratings' adjustments
Capitalized interest -- 71.8 (71.8) (71.8) (71.8) Reclassification of nonoperating income (expenses) 12,811.7 -- -- -- --Reclassification of
working-capital cash flow changes -- -- -- (834.1)
--Total adjustments 12,811.7 71.8 (71.8) (905.9) (71.8) EBIT Interest expense Cash flow from operations Funds from operations Capital expenditures
Taiwan Ratings' adjusted
amounts 18,134.7 1,397.2 24,164.3 23,330.2 12,352.8
NT$--New Taiwan dollar. Note: Formosa Plastics Corp. reported amounts shown are taken from the company's financial statements but might include adjustments made by data providers or
reclassifications made by Taiwan Ratings' analysts.
Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Taiwan Ratings' Ratings Definitions, www.taiwanratings.com, Aug. 6, 2010
Understanding TRC Rating Definitions, www.taiwanratings.com, Aug. 6, 2010
2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Corporate Criteria‐‐Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004
(Unless otherwise stated, these articles are published on www.standardandpoors.com, access to which requires a registered account)
Ratings
Detail
TRC Current Ratings Corporate Credit Rating twAA‐/Negative/twA‐1+
Corporate Credit Rating History 2011/08/02
2009/05/06 2007/12/06 twAA‐/Negative/twA‐1+ twAA‐/Stable/twA‐1+ twAA/Stable/twA‐1+
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