TRIS Rating has affirmed the company rating of Vinythai PLC (VNT) at “A-” with “stable” outlook. The rating is based on the company’s efficient and fully-integrated chlor-alkali production facility, strong financial profile, capable management team, and the support VNT receives from Solvay S.A. of Belgium (Solvay) and PTT Global Chemical PLC (PTTGC). However, these strengths are partially offset by the down cycle of the petrochemical industry, the narrower spread of VNT’s products, and the uncertainty of the global economy. The rating also takes into consideration the investment VNT made in an epichlorohydrine (ECH) plant in China. The “stable” outlook reflects the expectations that VNT will maintain its position as a low-cost producer and there will be no major threats to the PVC industry. VNT’s profitability is expected to improve. TRIS Rating expects VNT’s management team will continue its conservative financial policy and maintain sufficient liquidity at all times.
VNT’s business profile remains strong. The company is one of the two polyvinyl chloride (PVC) manufacturers. VNT’s major shareholders, including Solvay and PTTGC, have extended their full support to VNT’s operations. Solvay provides technical support and an international distribution channel, while PTTGC is a long-term supplier of ethylene, a key raw material for PVC. VNT’s PVC plant is fully backward integrated, yielding higher operating margin and cost advantages, compared with its rivals. As of September 2013, the company has the capacity to produce PVC (280 kilotons per annum, KTA), caustic soda (366 KTA), vinyl chloride monomer (VCM; 400 KTA), and ECH (100 KTA). Portions of the caustic soda and VCM volume that VNT produces are used internally as feedstocks to produce ECH and PVC.
After successfully launched ECH plant in Thailand in May 2012, VNT has planned to expand its ECH production capacity in China through the acquisition of Solvay Biochemical Taixing (SBT). SBT will construct a 100 KTA ECH plant in China. The budget for the China project is Bt7,200 million, with 67% of funds coming from debt financing. The project was initially scheduled to start up in the fourth quarter of 2014. In 2013, however, the project has been slowed down as ECH prices sharply dropped due to local oversupply situation. As such the plant production start up has been delayed, but no firm date has been mentioned.
In the first nine months of 2013, VNT’s sales volume comprised 191 thousand metric tonnes (KT) of PVC, 181 KT of caustic soda, 83 KT of VCM, and 55 KT of ECH. The sales volume of all products rose by 7.3% year-on-year (y-o-y) from September 2012. The increase was mainly due to the rising utilization rate of the ECH plant in Thailand. On average, the domestic market accounted for 80% of VNT’s total sales volume each year from 2008 through 2012. However, the domestic portion of the total sales volume declined to 73.8% in the first nine months of 2013. The export portion rose because about 70% of the VNT’s ECH sales were exported. The export portion is likely to increase and expose the company to more international risk once the ECH plant in China starts up.
VNT’s financial profile remains strong, supported by solid operating cash flow and low leverage. VNT’s revenues in the first nine months of 2013 were commensurate with TRIS Rating’s expectation but the operating margin was lower than the projection. Revenues increased to Bt12,917 million, up by 1.3% y-o-y. The operating margin before depreciation and amortization plunged to 9.6% in the first nine months of 2013, compared with 19.9% in the same period in 2012. The decreasing margin was mainly due to the lower spread for both PVC and ECH, and the falling price of caustic soda. The price of ethylene in Southeast Asia increased from an average of US$1,230 per tonne in 2012 to a nine-month average of US$1,323 per tonne in 2013. The average price of PVC increased at the slower rate, rising from an average of US$962 per tonne in 2012 to a nine months average of US$1,005 per tonne in 2013. The price of caustic soda was about US$396 per tonne in September 2013, falling by 18% from the average price in 2012. As a result, PVC full spread fell to an average of US$681 per tonne in 2013, down by 9.6% from the average spread last year. The cost of ethylene accounted for 40% of the total cost of goods sold in the first nine months of 2013. In addition, VNT’s ECH operation reported a net loss as ECH prices plunged due to the oversupply in China. The selling price of ECH tumbled from US$2,050 per tonne in January 2011 to US$1,563 per tonne in September 2013.
VNT’s leverage ratio increased moderately but remained low. As of September 2013, the debt to capitalization ratio was 20.6%. The company’s total debt increased to Bt4,179 million as a result of the investment of the ECH plant in Thailand last year. Funds from operations (FFO) and earnings before interest, tax, depreciation, and amortization (EBITDA) each halved from last year. In the first nine months of 2013, FFO was Bt1,232 million and EBITDA was Bt1,340 million, compared with Bt2,546 million and Bt2,606 million in the first nine months of 2012, respectively. However, liquidity was considered acceptable, as illustrated by VNT’s high cash reserve and strong cash flow protection measurement. VNT reported FFO to total debt ratio was 39.8% trailing 12 months ended September 2013 and EBITDA interest coverage ratio of 11.6 times.
TRIS Rating’s base case scenario assumes that the construction of ECH plant in China will complete after a year delay. Over next three years, the company’s operating margin is projected to improve as the PVC full spread is expected to widen. Prices for ethylene are expected to decrease over the next two or three years. Crude oil prices, which are significantly correlated to ethylene prices, are expected to decline gradually in 2014 and 2015, according to a forecast by the Energy Information Administration (EIA). The abundant supplies of shale oil in the US will create a cost advantage for US ethylene producers, leading to the increase in the ethylene production capacity. Rising supplies should partly reduce the recent hikes in global ethylene prices. A major concern would be the low price of ECH which, if prolongs, may pressure VNT’s profitability. VNT’s leverage ratio is likely to rise after financing the construction of its new ECH plant in China. The debt to capitalization ratio is expected to increase slightly but the ratio will most likely stay below 30% over the next three years.
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