Fitch Ratings has affirmed Chinese chemical company
The Outlook on the IDR is Stable.
Huayi is wholly owned by the Shanghai State-owned
The Stable Outlook reflects our expectation that government support will remain strong and Huayi's operations will remain stable, with net leverage remaining above 2.5x over 2022-2025.
Key Rating Drivers
'Strong' State Control and Support: Fitch assesses Huayi's status, ownership and control by the
Shanghai SASAC has provided support to Huayi consistently in the form of direct subsidies and capital injections, especially for R&D in specific chemical projects. Fitch expects the support to continue and therefore, we have assessed the support record and expectation factor at 'Strong'.
'Moderate' Impact on Funding: Fitch assesses the financial implications of a Huayi default as 'Moderate' because Huayi is an active domestic bond issuer, but the company's size is moderate compared with other
Strong Linkage with Subsidiary: Fitch fully consolidates Huayi's 41.99%-owned A-share listed associate,
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 driven by high capex, revenue impact from the Covid-19-related lockdown in
We expect capex to remain high at around
Derivation Summary
Fitch uses a bottom-up approach to rate Huayi under our GRE criteria, which is based on the SCP of 'bb' plus a two-notch uplift to 'BBB-', reflecting the potential support from the ultimate parent, Shanghai SASAC. The two-notch uplift is similar to that between other GREs and their government parents, such as
Huayi has exhibited higher cash flow volatility than other investment-grade chemical issuers because of its large exposure to the commodity chemical sector. Its 'bb' SCP is in line with
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue to increase by 16.3% in 2022 followed by minimal growth over 2023-2024 and a 5.7% drop in 2025;
Operating EBITDA margin of about 15% in 2022, gradually decreasing to 12% in 2025;
Annual capex of
No acquisitions over 2022-2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increasing likelihood of support from the
Funds flow from operations (FFO) net leverage below 3.0x on a sustained basis;
Net debt/EBITDA below 2.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weakening of linkage with the Shanghai SASAC;
FFO net leverage above 4.0x on a sustained basis;
Net debt/EBITDA above 3.5x on a sustained basis.
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 '
Liquidity and Debt Structure
Adequate Liquidity: Huayi had
Issuer Profile
Huayi is a medium-sized, state-owned chemical company with highly diversified products. It is the largest methanol producer in East China and among the three largest producers of acetic acid products in
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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