Fitch Affirms SCG Chemicals at 'A+(tha)'; Outlook Remains Negative

Stocks News Thursday February 2, 2023 09:45 —PRESS RELEASE LOCAL

Fitch Ratings has affirmed SCG Chemicals Public Company Limited's (SCGC) National Long-Term Rating and the senior unsecured rating of SCGC's THB100 billion medium-term note programme at 'A+(tha). The Outlook remains Negative.

SCGC's ratings are equalised with that of its stronger parent, The Siam Cement Public Company Limited (SCC, A+(tha)/Negative), under Fitch's Parent and Subsidiary Linkage Rating Criteria. The Negative Outlook mirrors the Negative Outlook on SCC, and reflects the risks associated with deleveraging over the next 12-18 months.

We assess SCGC's Standalone Credit Profile (SCP) at 'a-(tha)'. The SCP is constrained by our expectation of elevated leverage stemming from high capex and weak operating cash flow in 2023-2024. This is counterbalanced by SCGC's strong market position as one of south-east Asia's leading petrochemicals producers, serving multiple end-markets.

Parent's Deleveraging May Be Challenging: Fitch expects SCC's EBITDA net leverage to stay at 4.5x-5.0x in 2022-2023 (end-September 2022: 4.7x), due to weak earnings from its chemical business. The start-up of the Long Son Petrochemicals (LSP) project in Vietnam in mid-2023 and expected recovery in petrochemical spreads in 2024 should increase SCC's operating cash flow significantly. Weaker-than-expected business recovery and earnings contribution from LSP, as well as higher-than-expected capex without a corresponding equity injection, could lead to negative rating action.

'Medium' Legal Support Incentive: We assess SCC's legal incentive to support SCGC as 'Medium', as the parent unconditionally and irrevocably guarantees credit facilities of USD2.7 billion on SCGC's LSP project. We expect guaranteed debt to rise to around 50% of SCGC's total debt through 2023, which is when the project will be commissioned. The mix of guaranteed debt should reduce thereafter, but will remain high at between 20%-50% in the medium-term.

'High' Strategic Support Incentive: Our assessment is underpinned by SCGC's significant 40%-50% contribution to the parent's consolidated EBITDA. This is the highest among the parent's three core businesses; the others being cement and building materials (25%-35% of SCC's EBITDA), and packaging (20%-30% of SCC's EBITDA). SCGC also accounts for the majority of SCC's fixed-asset investments, which will rise due to the ongoing investments in the LSP project.

'Medium' Operational Support Incentives: We regard the level of management and brand overlap between SCC and SCGC as 'High'. SCC integrates management decisions on key subsidiaries, including SCGC, with the common 'SCG' brand for products sold across its cement and building materials, chemicals, and packaging businesses. However, we view operational synergies between SCC and SCGC as 'Weak', as each business is part of an independent value chain. This leads to immaterial avoidance cost of SCGC's operations to the parent, limiting operational incentives to provide support.

Planned IPO Neutral to Linkages: SCC filed for the IPO of SCGC with the local Securities and Exchange Commission in April 2022 and received approval in October 2022, but has not proceeded due to unfavourable market conditions. We do not expect the legal and strategic linkages between SCC and SCGC to change significantly if the IPO is completed. However, the IPO proceeds could be positive for SCGC's SCP and also SCC's financial profile if directed to reduce debt. We have not factored any equity proceeds into our assessment, as the IPO is subject to market uncertainty and execution risk.

High Leverage Pressures SCP: We forecast SCGC's EBITDA net leverage at about 10.0x in 2023-2024 on below-average chemical spreads. We estimate that leverage reached 11.5x by end-2022 (end-September 2022: 5.1x, end-2021: 3.8x) on high capex and petrochemicals spreads falling to multi-year lows. We estimate around THB25 billion of remaining LSP-project capex will be spent in 2023 and forecast leverage to fall to around 6.0x in 2024 and 3.0x in 2025 on lower capex and a continued recovery in the petrochemical business. Sustained higher leverage would adversely affect the SCP.

Weak Cash Flow: We estimate that SCGC's EBITDA plunged to THB7.0 billion in 2022, from THB33.6 billion in 2021, due to squeezed product spreads from high feedstock costs and weak demand. We expect EBITDA to increase in 2023, but mainly driven by the commissioning of the LSP project. The deterioration of the economic environment in 2023 is likely to dampen chemical demand in 2023, but this should be partly offset by China easing its strict "zero-Covid" policy. Cash flow will also be challenged by additional supply, mainly in Asia, pressuring chemical margins.

Leading Market Position: SCGC's SCP benefits from the company's leading market position in Thailand and south-east Asia, where it has the second-largest capacity of polyolefins and the largest capacity of polyvinyl chloride (PVC) products by equity stake. We expect SCGC's market position to improve over the medium term. The LSP project, the first and largest petrochemical complex in Vietnam, will increase SCGC's polyolefin capacity by around 50% and make the company the largest polyolefins producer in south-ease Asia when it is commissioned in 2023.

SCGC's National Long-Term Rating is equalised with its parent's rating, reflecting 'Medium' legal, 'High' strategic and 'Medium' operational incentives for the parent to provide support. SCGC's SCP, on the other hand, reflects its leading market position in south-east Asia in its core polyolefins and PVC products. However, the SCP is constrained by SCGC's mostly debt-funded expansion, which will pressure its financial leverage over the next two years.

We regard the linkages between SCC and SCGC as stronger than those between SCC and its packaging-subsidiary, SCG Packaging Public Company Limited (SCGP, A+(tha)/Negative, SCP: a(tha)). This is because SCGC has stronger legal links with its parent, as reflected in a corporate guarantee of around 50% of SCGC's debt, which is not available to SCGP. We also believe SCGC is also more strategically important to the parent, given its larger financial contribution to the group and higher share of group investments.

SCGC's SCP is weaker than that of PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, SCP: aa-(tha)). PTTGC is Thailand's largest integrated refining and petrochemical operator, with larger operating scale and product diversification. It also has a more conservative financial profile.

The SCPs of SCGC and Thai Oil Public Company Limited (TOP, A+(tha)/Negative, SCP: a-(tha)) - Thailand's largest and most complex oil refiner - are the same. Both companies have comparably strong business positions in their respective industries. However, SCGC has higher operating EBITDA, as TOP is exposed to a more volatile refinery business with a thinner operating profit margin. Both companies face high investments, pressuring leverage.


  • Revenue to rise by around 17% in 2023, driven by the start-up of the LSP plant.
  • EBITDA margin to remain low at 3%-4% in 2023, as we expect petrochemical spreads to remain weak.
  • Capex and investment plans totaling THB32 billion over 2023-2024.

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

  • The Outlook could be revised to Stable if the Outlook of SCC's National Long-Term Rating is revised to Stable, provided linkages between the issuers remain intact.

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

  • A weakening of linkages between SCGC and SCC.

For the ratings on SCC, the following sensitivities were outlined by Fitch in its 1 February 2023 rating action commentary:

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

  • The Outlook could be revised to Stable if SCC is on-track to reduce EBITDA net leverage to 3.5x by 2024, and lower thereafter.

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

  • Failure to meet the positive rating sensitivity.

Sufficient Liquidity: SCGC had THB31.4 billion of debt maturing within the next 12 months at end-September 2022, 91% of which was short-term loans and intercompany loans provided by the parent, which are revolving in nature. We believe SCGC's negative free cash flow in 2023 will mainly stem from the remaining investment in the LSP project, which will be supported by USD2.7 billion of committed credit facilities from banks. The company's liquidity is also supported by THB43.5 billion of undrawn uncommitted revolving facilities at end-September 2022.

SCGC is a wholly owned subsidiary and a key chemicals operating arm of SCC, one of Thailand's largest industrial conglomerates. SCGC is the second-largest downstream chemicals producer in Thailand and south-east Asia for its main products, polyolefins and PVC.

The principal sources of information used in the analysis are described in the Applicable Criteria.

SCGC's ratings are linked to SCC's ratings.

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