Outlook On Wanhua Chemical Group. Co. Ltd. Revised To Negative; 'BBB-' Rating Affirmed

          HONG KONG (Standard & Poor's) March 14, 2016--Standard & Poor's Ratings Services revised its rating outlook on Wanhua Chemical Group Co. Ltd. to negative from stable. In line with this revision, we lowered the long-term Greater China regional scale rating on Wanhua to 'cnBBB+' from 'cnA-.' At the
same time, we affirmed the 'BBB-' long-term corporate credit on the company. We also affirmed the 'BBB-' long-term issue ratings on the outstanding senior unsecured notes that Wanhua guarantees, and lowered the Greater China regional scale rating on the notes to 'cnBBB+' from 'cnA-.'
          "We revised the outlook because Wanhua's financial performance was much weaker in 2015 than we had anticipated and the company's financial leverage may remain higher than our downgrade trigger of 3.5x in 2016," said Standard & Poor's credit analyst Apple Lo.
          We attribute Wanhua's weak performance to a six-month delay in the commissioning of its new Yantai petrochemical plant. Further, the profitability of its methylene diphenyl diisocyanate (MDI) segment also declined due to price cuts of about 18% year over year in 2015. Based on our revised forecasts, we have revised our assessment of Wanhua's financial risk profile to significant from intermediate.
          We now forecast that Wanhua's ratio of debt to EBITDA will be 3.5x-4.0x over the next two years, compared with our previous projection of less than 3.0x and the 2015 level of 4.8x. Our revised forecast factors in the limited visibility over the revenue and profitability of Wanhua's Yantai petrochemical
plant. We see a one-in-three possibility that we will downgrade the company if it cannot moderate its leverage significantly in the next 12-18 months. 
          We affirmed the rating because of Wanhua's strong leadership position in the niche MDI market, the company's adequate operating efficiency, and lack of major capital expenditure within the next 12-18 months. The rating also reflects the company's high debt leverage, intense price competition outside
of its MDI-related products, and the oversupply in China's various commodity chemical markets, which are highly fragmented. Wanhua has a narrow business scope and geographic exposure. 
          Wanhua's financial leverage could improve over the next 12-18 months because Yantai's petrochemical plant began production and sales early this year. The company focuses on manufacturing more higher-margin products such as aliphatic diisocyanates (a paint material) to improve a loss in profitability for MDI. We therefore assess the comparative rating analysis as positive, which results in a one-notch uplift to the 'bb+' anchor.
          We assess Wanhua's stand-alone credit profile as 'bbb-'. We view the company as a core and insulated subsidiary of Wanhua Industrial Group Co. Ltd. Based on the group rating methodology under our corporate ratings criteria, the rating on Wanhua is capped at one notch above the group credit profile of 'bb+'.
          In our view, the group is strongly committed to maintaining majority ownership of Wanhua, given the company's high contribution to the group's EBITDA and cash flows. We believe Wanhua's business is integral to the overall group's strategy. The company has a long record of satisfactory operations in its core markets. The Wanhua group's reputation is at stake because the two companies share a brand name.
          We assess Wanhua as an insulated member of the group because the company operates as a separate entity and keeps its funds separate from other group companies. It could be separated from the group, and pay its liabilities out of its own funds. In addition, Wanhua is listed on the Shanghai stock exchange and is subjected to the listing rules.
          "The negative outlook for the next 12-18 months reflects our view that Wanhua's financial leverage may remain high due to limited visibility over the profitability of the company's new petrochemical products," said Ms. Lo.