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Fitch Affirms Polyplex Thailand at 'A-(tha)'; Stable Outlook

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Bangkok--30 Apr--Fitch Ratings

Fitch Ratings (Thailand) has affirmed Polyplex (Thailand) Public Company Limited's (PTL) National Long-Term Rating at 'A-(tha)'. The Outlook is Stable. The rating reflects PTL's leading position in the domestic polyester film business and the defensive nature of some end-markets, geographically diversified operations and strong financial profile. This is counterbalanced by the inherent volatility in the market prices of PTL's products given their commoditised nature.

The rating on PTL is based on its parent Polyplex Corporation Limited's (Polyplex Group) consolidated profile given Fitch's assessment of the strong linkage between PTL and its parent, which Fitch assesses as having a weaker credit profile than its subsidiary.

KEY RATING DRIVERS

Limited Impact from Coronavirus: Fitch expects the coronavirus pandemic and resulting economic downturn to have limited impact on PTL's sales volume. This is because around 60% of PTL's sales of polyester film (PET film) in the financial year ended 31 March 2019 (FY19) went to food packaging businesses, which should help lower the impact from coronavirus-related demand disruption on its PET film sales to industrial sectors. Fitch expects sales of food and grocery items to remain strong despite the strict social distancing and lockdown measures taken across many countries.

Lower Profit Margin Expected: Fitch expects market prices of PET films to come under pressure in 2020 from lower demand as economic growth slows significantly due to the pandemic. The commissioning of new capacity in the industry in 2020 will heighten profitability pressure amid weak demand for industrial applications. However, the erosion in profitability should be mitigated by the rapid drop in raw material prices, which are driven by crude oil prices.

We forecast Polyplex Group's EBITDA margin to decrease to 15%-16% in FY21 (9MFY20: 16.3%) due to lower product spreads and the change in product mix with the Polyplex Group's ramp up of new capacity in Indonesia primarily for commodity film production, which yields lower margin.

Expansion Supports Volume Growth: Fitch expects PTL's sales volume to rise at a mid-single digit percentage rate in FY21. The new capacity in Indonesia and strong demand for food packaging that it services is the key growth driver, and will more than offset the decline in sales volume of industrial film.

Strong Credit Metrics: We expect the Polyplex Group to post a net cash position in FY20, supported by its strong operating cash flow. This provides PTL with high rating headroom to support its committed capacity investment in FY21 and any deterioration in operating cash flow beyond our current expectations.

Leading Polyester Film Producer: The rating on PTL reflects its leading position in the polyester film business. The Polyplex Group is one of the 10-largest biaxially oriented polyethylene terephthalate (BOPET) film producers in the world by output, with market share of about 5%-7% in the thin PET film market. Polyplex group's production capacity is comparable with those of the global producers, such as Toray Advanced Film Co., Ltd. and Mitsubishi Polyester Film Inc. However, specialty films - which are somewhat less price-sensitive - make up a smaller share of Polyplex group's portfolio compared with its competitors.

Geographically Diversified Operations: PTL has four manufacturing facilities that cover three key markets - Thailand and Indonesia (Asia), the US (North America) and Turkey (Europe). A geographically diversified production base mitigates the seasonal demand in different continents and operational risk resulting from disruptions at one of its manufacturing plants. The proximity of production facilities to end-markets also helps reduce logistical costs and the impact from trade barriers, particularly in the net import regions like North America and Europe.

Commoditised Products: PTL has limited pricing influence in the polyester film business because the majority of its products are commoditised and face high competition. Standard films account for 65%-75% of PTL's total annual sales. Nevertheless, PTL increased value-added products to more than 35% of revenue in FY19 (from 33% at FY18) in a bid to offset the impact of economic cycles on commodity thin-films. Value-added products include metalised film, coated film and specialty flexible packaging.

Linkages with Parent: Fitch regards PTL as having strong operational linkages with Polyplex Group, and that PTL's Standalone Credit Profile (SCP) is stronger than that of its parent, as assessed under Fitch's Parent and Subsidiary Rating Linkage criteria. PTL's National Rating is therefore based on Polyplex Group's consolidated financial profile, which has been adjusted to include 100% of PTL but we deduct the profit from minority shareholders of PTL from the group's EBITDA. Fitch's assessment of strong linkage between the two entities is based on Polyplex Group's control of PTL's board and access to its subsidiary's cash flow.

DERIVATION SUMMARY
Polyplex Group's business profile is moderate relative to Thai downstream oil and gas companies, and chemical peers, while its financial profile is stronger.

Polyplex Group has a significantly smaller operating scale than IRPC Public Company Limited (A-(tha)/Stable, SCP: bbb(tha)), which is a fully integrated oil refining and petrochemical producer. However, Polyplex Group has more geographically diversified operations, which mitigate its concentration in the PET film business. Its products are used in downstream applications, with an increasing proportion of value-added products to help reduce the impact from the cyclical nature of commodity thin films. Polyplex Group also has lower financial leverage, which results in a higher rating than IRPC's 'bbb(tha)' SCP. IRPC's National Long-Term Rating incorporates a two-notch uplift to take into account its moderate linkages with its single largest shareholder, PTT Public Company Limited (AAA(tha)/Stable).

Eastern Polymer Group Public Company Limited (EPG, A-(tha)/Stable) and Polyplex Group operate in the polymer and plastic-product business, although they are in different end-market segments. EPG's operations are less geographically diversified, but serve more end-user segments. Both companies have low financial leverage with funds from operations net leverage of below 1.0x. Therefore, the ratings are the same.

Polyplex Group's business profile is slightly weaker than that of HMC Polymers Company Limited (HMC, A-(tha)/Negative, SCP: bbb+(tha)). We believe HMC's leading market position in south-east Asia offsets its lower geographical diversification compared with Polyplex Group. Nevertheless, Polyplex Group's lower financial profile leads to a higher rating than HMC's SCP.

KEY ASSUMPTIONS

Revenue of Polyplex Group to drop by about 14% in FY21 as sales volume growth from the new capacity in Indonesia will be offset by expected lower selling prices due to a drop in crude oil pricesOperating EBITDA margin of Polyplex Group of about 15%-16% in FY21-FY22. Weakened margin to reflect the ramp-up in production of new capacity in Indonesia, as well as weaker demand from industrial applicationsCapex to total about INR6.6 billion in FY21-FY22Dividend payout of 40% of net income

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

Significant increases in operating scale and specialty product sales resulting in higher and stable profit margin, while maintaining total net debt-to-EBITDA of Polyplex Group (with full consolidation of PTL) below 1.5x, although these are unlikely to occur over the next 12 to 18 months.

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

Lower cash flow or higher debt-funded investments than Fitch expects, leading to total net debt-to-EBITDA of Polyplex Group (with full consolidation of PTL) above 2.0x on a sustained basisDeterioration of EBITDA margin of Polyplex Group (with full consolidation of PTL) to below 13% on a sustained basis (FY19: 16%)

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Manageable Liquidity: Fitch regards PTL's liquidity as manageable. The liquidity is supported by its cash on hand of THB981 million at end-December 2019. Debt maturing over the next 12 months from December 2019 amounts to about THB1.3 billion, of which about 82% is short-term debt used mainly for working capital. PTL has available and undrawn working-capital facilities, although uncommitted, from financial institutions of about THB1.6 billion. Fitch expects the company to be able to roll over its short-term debt, supported by the low leverage. PTL has secured USD80 million of term loans to finance its new plants in Indonesia.

SUMMARY OF FINANCIAL ADJUSTMENTS
Polyplex Group's consolidated financial profile is adjusted to include 100% of PTL but we deduct the profit from minority shareholders of PTL from the group's EBITDA.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com

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