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Wanhua Overview

Moody's reviews Wanhua Chemical's Baa3 ratings for downgrade

Global Credit Research – 11 Mar 2016 Yantai


Hong Kong, March 11, 2016 — Moody's Investors Service has put on review for downgrade the Baa3 issuer rating of Wanhua Chemical Group Co., Ltd. (Wanhua Chemical), as well as the Baa3 rating on the senior unsecured notes issued by Wanhua Chemical International Holding Co., Ltd. and guaranteed by Wanhua Chemical.


"Our review of Wanhua Chemical's ratings reflects the company's weaker than expected operating performance for the year ended 31 December 2015, against the backdrop of a slowdown in Chinese demand, and the challenges that the company faces in lowering its elevated debt levels over the next 12-18 months," says Lina Choi, a Moody's Vice President and Senior Credit Officer, and the International Lead Analyst for Wanhua Chemical.

Moody's also notes Wanhua Chemical's worsening liquidity position. In 2015, Wanhua Chemical refinanced some of its longer-term debt with short-term debt, and relied on short-term financing to reduce borrowing costs. Consequently, the company's short-term debt rose to RMB12 billion, up from RMB7 billion the year before, and dwarfed its RMB2 billion cash balance at end-2015.

In 2015, Wanhua Chemical recorded an 11.8% decline in revenues and a 13.9% fall in reported gross profit, because the company suffered a significant price reduction of about 20% in methylene diphenyl di-isocyanate (MDI). This situation was mitigated partially by an estimated 10% increase in MDI sales volumes. MDI accounted for about two thirds of the company's total revenues during 2015. The company has maintained a strong market position in MDI; a segment which demonstrates an oligopolistic market structure with high entry barriers.

The company's adjusted debt/EBITDA also rose to about 5.0x at end-2015, up from 4.0x at end-2014. At end-2015, Wanhua Chemical's adjusted net debt rose by RMB2.7 billion to about RMB24.6 billion to fund the shortfall in its cash flow as well as dividend payments.

Moody's expects that Wanhua Chemical's revenue will remain under pressure due to weak demand in its end markets of construction, home appliance and other manufacturing activities. Despite the continued growth in its production volumes of MDI, average selling prices will remain low when compared to historical levels. The lower raw material costs will not be sufficient to offset the impact of the price declines, which will in turn result in lower earnings.

In addition, the slower than expected ramp-up of its petrochemical production at Yantai Chemical Industrial Park will result in elevated operating expenses and therefore a slower improvement to its earnings during 2016.

As a result, its debt/EBITDA will likely breach the downgrade trigger of 4.0x over the next 12-18 months.

During the rating review, Moody's will focus on reviewing the company's plan and ability to:

1) Profitably ramp up its new petrochemical production levels; and

2) Improve earnings and cash flow, while reducing its debt leverage.

At the same time, Moody's will also review the company's liquidity trend and its financial management policy.

The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Ratings Methodologies page on for a copy of this methodology.

Wanhua Chemical Group Co., Ltd., the largest producer of methyl diphenyl diisocyanate (MDI) globally by production capacity, exhibited an annual capacity of MDI of about 1.8 million tonnes during 2015.

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

The Local Market analyst for this rating is Jiming Zou, +86 (21) 2057 4018.–PR_345423