Thai Rating and Information Services Co., Ltd. (TRIS) announced Thursday 25 January 2001 that it has assigned a "BBB" rating to Vinythai PLC's (VNT) Bt7,400 million senior debentures. The rating is based on VNT's low cost position, its capable management team and the favorable outlook of the global polyvinyl chloride (PVC) market. The rating also takes into consideration support from its principal shareholders, Solvay S.A. and Charoen Pokphand group (CP). However, these strengths are limited by VNT's rather weak cash flow protection; funds from operation-to-total debt was only 6.6% in 1999 and 15.9% for the first nine months of 2000. Also, the oversupply of PVC in the domestic market will certainly reduce the profit margins of Thai producers because they have to export their excess products.
According to TRIS's report, VNT is Thailand's second largest PVC manufacturer with about 26% of total domestic capacity and sales of about 36% of domestic consumption in 1999. VNT's full backward integration in 1996 has significantly enhanced its cost competitiveness. VNT's gross margin before depreciation and amortization in 1999 at 42% was far higher than the 32% margin of the largest PVC producer in Thailand, Thai Plastic and Chemicals PLC (TPC).
Solvay, the sixth largest PVC producer in the world with a capacity of 1.096 million tons per annum, has a 46% ownership in VNT. The production complex of VNT was constructed to meet international standards under the supervision of Solvay. The spread on the Electrochemical Unit (ECU), which integrated PVC producers normally use to measure industry health, reached the bottom of the cycle in July 1998 at US$291 per ton. This measure was at US$420 per ton in August 2000. Given the likelihood of limited capacity expansion worldwide during the next two to three years because of the poor PVC market in 1996-1998 and the soft landing of U.S. economy, TRIS expects that the average spread on the ECU will be at the current level for the next two to three years. However, Thai producers will not enjoy margins as high as in the past because the government has to cut the import tariff on PVC from 15% to between 10% to 5% during 2001 and 2003 to comply with the ASEAN Free Trade Area (AFTA) commitments. Selling their excess capacity overseas will also trim the Thai producers' margins because of increasing transportation costs and because the export price does not have the import tariff benefit.
Solvay and CP group have committed to providing up to Bt800 million through equity or subordinated loans to VNT to ensure that the company has the liquidity to service debt if there is any shortfall. VNT has reported impressive profitability ratios since 1997. Gross profit margins before depreciation and amortization have increased: 27.8% in 1996, 43.4% in 1997, 38.7% in 1998 and 42.4% in 1999. This performance is related to the completion of backward integration and the depreciation of the baht. VNT's sales and only about 40% to 50% of operating costs are linked with the US dollar. After a capital increase in May 2000, the company's debt-to-capitalization ratio was 62% in September 2000, a sharp declined from the 85% to 100% ratio seen from 1997 to 1999. Funds from operation-to-total debt improved from 2% in 1998 to 6.6% in 1999 and to 15.9% for the first nine months of 2000, but this remains weak.
Vinythai PLC (VNT) Issue Rating VNT068A: Bt7,400 million senior debentures due 2006 BBB