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Wanhua Debt Rating Update

Moody's: Wanhua Chemical's rise in leverage in 1H 2015 is credit negative; ratings unaffected

Global Credit Research – 21 Aug 2015 Yantai


Hong Kong, August 21, 2015 — Moody's Investors Services says that Wanhua Chemical Group Co., Ltd.'s increased leverage in 1H 2015 is credit negative, but will have no impact on the company's Baa3 issuer rating and Baa3 rating on the senior unsecured notes issued by Wanhua Chemical International Holding Co., Ltd. and guaranteed by Wanhua Chemical Group Co., Ltd. The ratings outlook is stable.


"Wanhua Chemical's rise in financial leverage is within our expectations and should improve to a level more consistent with its Baa3 rating level over the next 12-18 months," says Lina Choi, a Moody's Vice President and Senior Analyst, and also the International Lead Analyst for Wanhua.


Adjusted debt/EBITDA rose to around 4.4x at end-June 2015 from 4x at end-2014, as adjusted debt grew by 8% to about RMB25 billion to fund the remaining portion of capital spending earmarked for its Yantai Wanhua Industrial Park project in the city of Yantai in Shandong Province.


The project — which involves constructing a new methylene diphenyl diisocyante (MDI) plant and liquefied petroleum gas(LPG)-based basic chemical production line — was started in 2011.


"This level of leverage is weak for the Baa3 rating category, but adjusted debt/EBITDA will likely fall to around 4x at end-2015 and further to 3x-3.5x in 2016, driven by lower capital spending and the ramp-up of its new plants," says Jiming Zou, a Moody's Vice President and Senior Analyst, and also the Local Market Analyst for Wanhua Chemical. "These expected levels for adjusted debt/EBITDA are consistent with the Baa3 rating."


Moody's further expects capital expenditure to decline significantly over the next 12-18 months with the near completion of the project in Yantai.


Therefore, such expenditure will fall to RMB4 billion in 2015 and then to RMB2 billion in 2016 from RMB9 billion in 2014.


The company incurred capital expenditure of RMB2.4 billion in 1H 2015 and its investment cycle peaked in 2014 due to the Yantai industrial park project.


In addition, the expected ramp-up in production of MDI and LPG chemicals will provide an incremental rise in earnings as well as cash flow for debt reduction in 2016.


Accordingly, Moody's expects adjusted EBITDA to grow 15%-20% year on year in 2016, after staying flat in 2015.


For 1H 2015, Wanhua Chemical's total revenue and adjusted EBITDA were RMB10 billion and RMB2.97 billion, down 14% and 2% from a year ago. The decrease in revenue was mainly caused by sluggish demand and a drop in selling prices for MDI in 1H 2015.


Moody's will continue to monitor the progress of Wanhua Chemical's LPG production line, as well as the company's efforts to deleverage. Any material deviation from Moody's expectations could be negative to the company's ratings and outlook.


The principal methodology used in this rating was Global Chemical Industry Rating Methodology published in December 2013. Please see the Credit Policy page on for a copy of this methodology.


Wanhua Chemical Group Co., Ltd. — the world's largest producer of MDI — is incorporated in Yantai, Shandong Province.


The company listed on the Shanghai Stock Exchange in 2001. It is 50.5% owned by Wanhua Industrial Group Company Ltd. (unrated), which in turn is 39.5% owned by the Yantai State-owned Assets Supervision and Administration Commission.–PR_333013