Fitch Confirms Shanghai Huayi at ‘BBB-‘; Stable outlook
Fitch Ratings has confirmed the Chinese chemical company
The outlook on the IDR is stable.
Huayi is 100% owned by Shanghai State Corporation
The stable outlook reflects our expectation that government support will remain strong and that Huayi’s operations will remain stable, with net leverage remaining above 2.5x over the 2022-2025 period.
Main rating factors
“Strong” State Control and Support: Fitch assesses the status, ownership and control of Huayi by the
Shanghai SASAC has provided constant support to Huayi in the form of direct grants and capital injections, especially for R&D in specific chemical projects. Fitch expects support to continue and therefore we have rated the support record and expectation factor at “Strong”.
‘Moderate’ impact on funding: Fitch rates the financial implications of a Huayi default as ‘moderate’ because Huayi is an active domestic bond issuer, but the size of the company is moderate compared to others .
Strong link with the subsidiary: Fitch fully consolidates the A-share listed partner 41.99% owned by Huayi,
Stable leverage, increasing scale: Fitch expects Huayi’s net leverage (net debt/EBITDA) to increase to 2.6x in 2022 (2021: 1.9x). This is due to high capital expenditure, the impact on revenue from the Covid-19 related lockdown in
We expect capital expenditure to remain elevated at around
Fitch uses a bottom-up approach to evaluate Huayi against our GRE criteria, which is based on the SCP of “bb” plus a two-notch increase to “BBB-”, reflecting potential support from ultimate parent company, Shanghai SASAC. The two-notch upswing is similar to that between other GREs and their government relatives, such as
Huayi has shown higher cash flow volatility than other high-grade chemical issuers due to its high exposure to the commodity chemicals sector. His ‘bb’ SCP is online with
Fitch’s main assumptions in our rating file for the issuer:
Revenue increase of 16.3% in 2022, followed by minimal growth over 2023-2024 and a decline of 5.7% in 2025;
Operating EBITDA margin of around 15% in 2022, gradually decreasing to 12% in 2025;
Annual investments of
No acquisitions over 2022-2025.
Factors that could, individually or collectively, lead to positive rating action/improvement:
Increased likelihood of support from the
Net leverage of funds from operations (FFO) below 3.0x on a sustainable basis;
Net debt/EBITDA less than 2.5x on a sustainable basis.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
Weakening of ties with SASAC in Shanghai;
Net FFO leverage greater than 4.0x on a sustainable basis;
Net debt/EBITDA above 3.5x on a sustainable basis.
Best/Worst Case Evaluation Scenario
International credit ratings of non-financial corporate issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches over a rating horizon three years; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from ‘
Liquidity and debt structure
Adequate liquidity: Huayi had
Huayi is a medium-sized state-owned chemical enterprise with highly diversified products. It is the largest methanol producer in eastern China and one of the three largest producers of acetic acid products in
REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR
The main sources of information used in the analysis are described in the applicable criteria.
Unless otherwise specified in this section, the highest level of ESG credit materiality is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on the entity’s credit, either because of their nature or the way they are managed by the entity. For more information on Fitch’s ESG materiality scores, visit www.fitchratings.com/esg