HMC Debentures Rated A-(tha)

Fitch Rates HMC Polymers' Proposed
Debentures 'A-(tha)'

Fitch Ratings-Bangkok-17 September 2020:

• Report below abridged

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Fitch Ratings (Thailand) has assigned HMC Polymers Company Limited's (HMC, A-(tha)/Negative) proposed senior unsecured debentures of up to THB5 billion a National Long-Term Rating of 'A-(tha)'. The proceeds of the debentures will be used to refinance its existing bank loans and for working capital. The proposed debentures constitute direct, unsecured, unconditional and unsubordinated obligations of the company and are rated at the same level as HMC's National Long-Term Rating.

HMC's 'A-(tha)' rating incorporates a one-notch uplift from its 'bbb+(tha)' Standalone Credit Profile (SCP), as Fitch has assessed that HMC has moderate linkages with PTT Global Chemical Public Company Limited (PTTGC; AA+(tha)/Negative, SCP: aa-(tha)), its largest shareholder with a 41% stake, in line with our Parent and Subsidiary Linkage Rating Criteria.

Key Rating Drivers

Leading South-East Asian PP Producer
HMC is the largest PP producer in Thailand, with a market share of about 33% in 2019. The company is also one of the leading PP manufacturers in south-east Asia. HMC's capacity will increase to about 1.1 million tonnes per annum by 2022, making it the largest PP producer in the region after the PP line 4 is completed.

Focus on High-Value-Added Products
HMC focuses on differentiated and specialty products, which have lower competition and higher margins. The proportion of sales of these products increased to around 46% in 2019, from about 35% in 2015. The company plans to raise the contribution to more than 60% of sales after its PP line 4 is fully operational.

Leading Technology, Product Innovation
HMC uses leading PP technology from LyondellBasell, a key shareholder, in its production. It will use the latest PP technology for its PP line 4 - one of only two plants in the world that can use C6 monomer to enhance PP properties - and expand its product portfolio for new applications.

Partial Integration; Diversified Feedstock
HMC has partially moved towards upstream production via its PDH plant, supplying feedstock for about 40% of its PP production. The remaining propylene feedstock is secured under long-term contracts with PTTGC, Rayong Olefins Company Limited (in which HMC holds a 14.3% stake) and a local refinery. HMC has from time to time imported propylene to manage supply risk.

Feedstock Pricing Reduces Volatility
HMC procures propane, which is available domestically, from PTT Public Company Limited (BBB+/Stable), PTTGC's parent, under a gas-supply agreement based on a net-back pricing scheme linking gas feedstock prices with PP prices.

Leverage to Increase
Fitch expects HMC's FFO net leverage to increase substantially to about 4.5x-5.5x in 2020-2021, from 2.5x in 2019, due to the construction of the new PP line with production capacity of 250,000 tonnes per annum. The project will cost about USD300 million, or THB9.4 billion, which will be spent mostly in 2020-2021. Fitch expects HMC's financial leverage to decrease to about 3.2x in 2022 and 2.5x in 2023, when the PP line 4 is fully operational.

Cyclicality and Limited Diversification
HMC's credit profile is tempered by its limited product diversification and the inherent cyclicality of the industry. The company's earnings and cash flow are affected significantly by volatile petrochemical prices and margins, and demand-supply dynamics.

Linkage with PTTGC
We assess linkages between HMC and PTTGC to be moderate. HMC is a propylene off-taker of PTTGC, which considers HMC as its key vehicle in the PP business. HMC has a non-compete arrangement with PTTGC for petrochemical products, reflecting their strategic linkages. PTTGC and LyondellBasell appoint the majority of HMC's directors and some key management personnel. Fitch believes PTTGC is likely to provide extraordinary support to HMC, if needed, without any constraints.

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