Bangkok--30 Nov--Fitch Ratings Fitch Ratings (Thailand) Limited has today affirmed the National Long-term 'BBB+(tha)' rating of Thailand-based Vanachai Group Public Company Limited's (VNG) secured debentures No.1/2003 due June 2008. The debentures are secured by assets of VNG's wholly-owned subsidiary, Vanachai Panel Industries Company Limited. The rating reflects VNG's standalone creditworthiness and the value of assets pledged over the security. VNG's credit strengths are supported by its well-established market position domestically, as well as its high level of production integration via the production of glue and forward expansion into value-added products. In addition, the rating is backed by a strong regional demand outlook for wood-based panels, which should support VNG's export sales growth. Nonetheless, rising raw material costs continued to put pressure on VNG's margins over the past three years, with EBITDAR margins declining to about 25% in late 2005 to 9M07, compared with 35% in 2004. Other key credit concerns include the volatile nature of Particle Board (PB) and Medium Density Fibreboard (MDF) prices as a result of large oversupply in this region and intensifying competition amongst key regional producers. The company is also exposed to foreign exchange risk incurred from the strong Thai baht appreciation which negatively impacts its US dollar export revenue. VNG reported strong operating performance in 9M07, driven by sales growth from the commencement of the new MDF line in Q406 and a rise in MDF prices. Export sales, mainly to China, South Korea, South Asia, Indochina and the Middle East, accounted for 63% of total sales in 9M07, while domestic sales contributed to the remainder. VNG's EBITDAR increased by 12% yoy to THB1.3 billion for 9M07, while its Q407 outlook is expected to remain strong. However, VNG's net adjusted debt to last-twelve-month EBITDAR ratio remained relatively high at 3.0x at end-9M07 (at end-2006: 3.3x), due to debt funding of its MDF expansion. VNG announced a new MDF project costing THB2.7bn in Q307. This project will add 300,000 cubic meters per year (cu.m./y) of MDF capacity, with a scheduled commencement of operations by end-2009. As the project will be debt-funded, VNG's net adjusted debt to EBITDAR ratio is likely to remain high in the range of 3.0x-3.5x during 2007-9. VNG's liquidity is manageable, supported by its strong cash flow generation, cash balance of THB1.0bn and the remaining undrawn credit facilities of THB660 million as of end-9M07. In the event of further debt-funded investments that results in a worse-than-expected financial leverage, a negative revision of the rating could be triggered, while sustainable net debt reduction and net adjusted debt to EBITDAR ratio of below 2.0x could lead to a positive revision. VNG and its subsidiaries are Thailand's largest producers and distributors of MDF and PB, with total capacities of 480,000 cu.m./y and 900,000 cu.m./y, respectively. VNG is 66%-owned by the founding Sahavat and Jareonnawarat families.