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, and the support from Solvay S.A. (Solvay) of Belgium and PTT Global Chemical PLC (PTTGC). However, these strengths are partially offset by the down cycle of the petrochemical industry, the narrower spread of polyvinyl chloride (PVC) chain, and the weak performance of the epichlorohydrine (ECH) segment. The rating also takes into consideration VNT’s conservative financial policies implemented during the downturn and the postponement of its investment in an ECH plant in China. The “stable” outlook reflects the expectations that VNT’s management team will continue its conservative financial policies and maintain sufficient liquidity at all times. TRIS Rating views that the upgrade potential for VNT’s rating or outlook is limited at this moment, given weakened environment in the petrochemical industry. However, VNT’s rating or outlook could be revised downward over the next six to 18 months if VNT’s cash flow, measured by EBITDA, is significantly lower than TRIS Rating’s expectation for an extended period.
VNT’s business profile remains strong. The company is one of the two PVC manufacturers in Thailand. VNT’s major shareholders are Solvay and PTTGC. Solvay provides technical support and an international distribution channel, while PTTGC is a long-term supplier of ethylene. VNT’s PVC plant is fully backward-integrated, starting from the electrolysis of brine through PVC polymerization. The fully integrated process helps boost VNT’s operating margin and provide cost advantages over its rivals. As of December 2014, the company had the capacity to produce 280 kilotons per annum (KTA) of PVC, 366 KTA of caustic soda, 400 KTA of vinyl chloride monomer (VCM), and 100 KTA of ECH. Portions of the caustic soda and chlorine volumes that VNT produces are used internally as feedstock to produce ECH and PVC.
VNT’s business risk reflects an exposure to the volatility of spreads between the prices of its products and feedstock, and competition between ethylene-based and coal-based PVC. A sudden change in product spreads could have a direct impact on VNT’s profitability and cash flow generation. While the upside gain of price of PVC is restrained by PVC made from cheaper feedstock.
Although VNT’s performance weakened during the past year, its financial profile remains strong enough to maintain its current rating. Its financial strength is underpinned by low leverage and adequate cash flow generation which will support the company to be able to operate during the downturn.
In 2014, VNT’s performance remained weak despite the slight improvement in the last quarter. The operating margin before depreciation and amortization (operating margin) was 9.1%, compared with 8.8% in 2013. The low level of margin reflected a narrower full spread of PVC and unprofitable operation of ECH segment.
The spread of PVC showed a recovery signal in the fourth quarter of 2014. After September 2014, ethylene prices fell sharply, tracking a slump in crude oil prices. The price of ethylene dropped from more than US$1,400 per tonne to around US$1,000 per tonne in the last quarter of 2014. Prices of PVC also fell but declined more slowly than the price of ethylene, leading to widened spread of PVC. As a result, VNT’s profitability rose and competition from coal-based PVC lessened. The VNT’s operating margin in the fourth quarter of 2014 rose to 11.1 % from 7.4% in the third quarter.
VNT’s capital structure is considered very strong and can serve as an adequate cushion. As of December 2014, the leverage improved as the debt to capitalization ratio was 16.6%, reducing from 17.5% at the end of 2013. The company’s loan prepayment during 2013-2014 cut its debt burden and increased financial flexibility. Total debt lowered to Bt3,000 million at the end of 2014, down from the peak of Bt4,179 million as of September 2013. VNT’s debt to capitalization ratio is not expected to increase as the ECH project in China is on hold at the moment and the company is not expected to make any material capital expenditures in the coming year. VNT would make another voluntary prepayment in 2015 that it would reduce the amount of loan repayment in 2016.
VNT’s liquidity is considered adequate, as illustrated by VNT’s high cash reserves and strong cash flow protection measurements. VNT reported the funds from operations (FFO) to total debt ratio at 53.3% in 2014. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio was 10.8 times. EBITDA is expected to stay over Bt1,500 million per annum over the next three years.
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