Sinochem International Corp. And Proposed Notes Assigned 'BBB+' And 'cnA+' Ratings; Outlook Stable

          HONG KONG (S&P Global Ratings) July 12, 2017--S&P Global Ratings today said it has assigned its 'BBB+' long-term corporate credit rating to China-based chemical producer Sinochem International Corp. (SIC). The outlook is stable. At the same time, we assigned our 'BBB+' long-term rating to the senior unsecured notes issued by SIC's wholly owned subsidiary Sinochem International Development PTE. Ltd. and guaranteed by SIC. The issue rating is subject to our review of the final issuance documentation. In addition, we also assigned our 'cnA+' long-term Greater China regional scale rating to the company and the proposed notes.
          The rating on SIC reflects its status as a highly strategic subsidiary of Sinochem Group, which owns 55.76% of the company. As such, the rating on SIC is one notch below the group credit profile (GCP) of Sinochem and will move in tandem with the group. We assess the GCP at 'a-' after factoring in the extraordinary support the group would likely receive from the Chinese government if in distress, based on Sinochem Group's contribution to national food security. On a stand-alone basis, we assess SIC at 'bb-'.
          By our estimation, SIC has a fair business risk profile due to its relatively large scale and its leading global position in a number of its products. SIC has seven major segments: agrochemical, rubber chemicals, intermediaries & new materials, chemical logistics, chemical distribution, natural rubber, and other trading business. Natural rubber was the largest revenue contributor in 2016 (29%) while intermediaries & new materials was the largest gross profit contributor last year (26%).
          SIC develops fine chemicals used in the agricultural, intermediaries & new materials, and rubber industries. The company also cooperates with Monsanto by selling the U.S. agrichemical company's products in China and acting as an agent for Roundup, one of the most notable glyphosate brands globally. In 2015, SIC acquired Jiangsu Yangnong Chemical Co. Ltd., which is a pesticide and herbicide manufacturer listed on the Shanghai Stock Exchange; Yangnong has been delivering stable results. SIC's flagship subsidiary in rubber chemicals is Jiangsu Sinorgchem Technology Co. Ltd., which has a 40% market share globally in PPD, an antioxidant used in synthetic and natural rubber. Its clients include major tire manufacturers such as Michelin, Bridgestone, and Goodyear. The company plans to further integrate its value chain from chlor-alkali to pesticides and herbicides, in order to lower costs and improve efficiency.
          In natural rubber, through acquisitions and consolidations both domestically and internationally, SIC has built a value chain covering plantation, processing, and distribution. After the acquisition last year of Halcyon Agri Corp. Ltd. (Halcyon), a Singapore-listed company, SIC has become one of the largest natural-rubber suppliers globally with a processing capacity of 1.4 million tons per year. SIC will continue to integrate Halcyon with its existing natural rubber business to improve returns.
          SIC has been shrinking its chemical distribution business due to its lower margin and we expect this trend will continue. However we believe SIC will maintain a certain scale of this business so as to retain market influence and gain market intelligence.
          SIC's operating performance has been relatively stable in 2016 compared with the previous year, however the acquisition of Halcyon in August 2016 led to significant increase in debt. We expect revenues will be relatively flat in 2017 and 2018, with lower chemical-distribution revenues offset by modest revenue growth in the other segments due to recovering oil prices. We also expect the gross profit margins of individual segments to remain relatively stable but the consolidated gross profit margin will increase due to a smaller contribution from the lower-margin chemical distribution business. As we forecast SIC's gearing will remain relatively high, the company's credit metrics will remain in the aggressive category.
          We assess SIC as a highly strategic subsidiary of Sinochem Group because SIC is the flagship listed company of Sinochem Group's chemical segment. SIC is the consolidator of Sinochem Group's chemical businesses and subsidiaries, especially in agrochemical and rubber. By end-2016, SIC accounted for 13% of Sinochem Group's total assets, 16% of net assets, and 6% of operating profits.
          In our view, Sinochem Group is one of China's most important central state-owned enterprises (SOEs), due to its role in supporting national food and energy security through its broad trade networks and business footprint. The group operates several national strategic reserves for important materials such as crude oil, refinery products, natural rubber, agricultural seeds, and fertilizers.
          Sinochem Group's margins are low because of the company's significant trading volume in oil, chemicals, and other products, which are low margin in nature. However, the margins are stable and are generally at par with peers in the trading business. The group continues to derive the majority of its revenues from its trading business. We believe crude oil will have a limited impact on the group's profitability, given that the scale and contribution of the upstream assets is still small. We expect the Quanzhou refinery, which commenced operations in end-2014, to continue to contribute to revenue and profit growth in 2017 as it ramps up its operations.
          We expect Sinochem Group's planned capital expenditure, particularly in the oil and gas segment, to remain high over the next two years. The group is still highly dependent on debt for funding because it is in a high-investment phase for its non-trading business. We anticipate that Sinochem Group will continue to generate negative discretionary cash flows over the next 24 months, resulting in higher debt. We expect the group's ratio of FFO to debt to be 9%-10% over the next two years and FFO interest coverage to be 3.6x–4.2x.
          We believe Sinochem Group has very high likelihood of receiving extraordinary support from the Chinese government in the event of financial distress. This is based on its very strong link and very important role to the government.
          The Chinese government wholly owns Sinochem Group, and deems agriculture as a strategically important sector. The government is able to exert a strong influence on the group by appointing senior management. Sinochem Group plays a vital role in supporting China's grain productivity and safety, and national food security. The group also plays important roles for the government in operating national strategic reserves for important materials. In our view, the group provides important agriculture input products and public services that are not easily undertaken by the private sector.
          The stable outlook on SIC reflects its status as a highly strategic subsidiary of Sinochem Group, as well as our credit outlook on Sinochem Group. We believe Sinochem Group will benefit from its business diversity and maintain its financial performance over the next 12-24 months, with FFO interest coverage ratio slightly below 4x. We also expect the Chinese government to provide very strong extraordinary support to Sinochem Group if needed.
          We may upgrade SIC if we raise our group credit profile of Sinochem Group. This could happen if (1) Sinochem Group reduces its leverage while vertically integrating operations such that its FFO interest coverage rises to 4.5x or more for a sustained period; or (2) we assess that the likelihood of timely and sufficient extraordinary government support for Sinochem Group has significantly strengthened.
          We could also upgrade SIC if we believe its group status within the Sinochem Group has strengthened, which is remote in the next two years, in our view.
          We may downgrade SIC if we lower our group credit profile of Sinochem Group. This could happen if: 1) Sinochem Group pursues more large-scale acquisitions or construction of new projects and primarily funds these with debt, such that its FFO interest coverage falls below 2.5x over a prolonged period; or 2) we assess that the likelihood of timely and sufficient extraordinary government support for Sinochem Group has weakened.
          We may also downgrade SIC if we believe its group status within the Sinochem Group has weakened, which we believe is remote in the next two years.
          We assigned our 'BBB+' long-term issue rating and 'cnA+' long-term Greater China regional scale rating to a proposed issue of U.S. dollar-denominated senior unsecured bonds by Sinochem International Development PTE Ltd., a wholly owned subsidiary of SIC. The ratings on the bonds are subject to our review of the final issuance documentation. The issuer intends to use the proceeds to refinance its existing debt and for general corporate purposes. SIC provides an unconditional and irrevocable guarantee for the bonds.
          The issue rating on the bonds is the same as the issuer credit rating on SIC, even though the company's ratio of priority liabilities to adjusted total assets exceeds 20%. In our view, the company's diverse businesses could temper the structural subordination risk. The rating on SIC factors in the group support by Sinochem Group if needed, which in our view, could flow to the bonds, given that the company's guarantee constitutes its senior obligations. The bonds have no financial covenants and may be redeemed early under a number of circumstances, including, but not limited to, a change of control and breach of undertakings.
          We believe the issuance will have a minimal impact on SIC's cash flow and leverage ratios, given that the company will mainly use the proceeds to refinance existing debt.

Sinochem International Corp. And Proposed Notes Assigned 'BBB+' And 'cnA+' Ratings; Outlook Stable

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