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Wanhua To Raise Equity

Moody's: Wanhua Chemical Group's equity placement is credit positive

Global Credit Research – 19 Nov 2015 Yantai


Hong Kong, November 19, 2015 — Moody's Investors Services says that Wanhua Chemical Group Co., Ltd.'s (Wanhua) proposed equity placement to institutional investors is credit positive because the company's capital structure and debt leverage will improve if the new equity is raised.

However, the equity placement will not affect Wanhua's Baa3 issuer rating or the Baa3 senior unsecured debt rating on the RMB1 billion in notes issued by Wanhua Chemical Int'l Holding Co., Ltd. and guaranteed by Wanhua.

The outlook on Wanhua's ratings remains stable.

On 16 November 2015, Wanhua announced that it planned to issue up to RMB2.5 billion in equity capital to institutional investors.

The proceeds from the equity placement will be used for investment in a new polycarbonate resin production facility, to build a business service center in Shanghai, and to repay bank loans and fund working capital requirements.

"If Wanhua is successful in raising the RMB2.5 billion in new equity, its debt leverage in 2016 will improve," says Jiming Zou, a Moody's Vice President and Senior Analyst and also Moody's Local Market Analyst for Wanhua.

If the proposed new equity is issued, Wanhua would benefit through:

(1) Its equity base increasing by about 17% to RMB17 billion;

(2) Its gross debt falling, because part of the proceeds from the equity issuance will be used to repay bank loans; and

(3) The company's new debt requirement falling, because capital expenditures for the polycarbonate resin facility and business service center can be funded by proceeds from the new equity.

Moody's believes that Wanhua's debt leverage — as measured by adjusted debt/EBITDA — peaked at 30 June 2015 at around 4.4x versus 4.0x at end-2014. The higher debt leverage was due to the company having spent the remaining portion of capital earmarked for its Yantai Wanhua Industrial Park project.

The company's capital expenditure in 2016 — including for its newly announced projects — will remain below the expected total of about RMB5 billion in 2015. The amount will also represent less than half the RMB9 billion total in 2014.

While Wanhua indicated that it would use some of the equity proceeds for a RMB1.46 billion, 200,000 ton per annum polycarbonate project, Moody's expects the investment will span over several years and will not adversely affect its debt leverage in 2016.

The polycarbonate project, if successful, will enhance the cost benefits of its vertically integrated production process and improve its future earnings.

However, Wanhua faces technical challenges and operational barriers in achieving commercial production of polycarbonate. So far, the global market for polycarbonate has been dominated by major chemical companies, including Bayer AG (A3 stable) and Saudi Basic Industries Corporation (A1 stable).

Moody's expects that Wanhua's adjusted debt/EBITDA will stay below 4.0x in 2016; a level which supports its Baa3 issuer rating.

Moody's says the equity placement will not change significantly the company's shareholding structure, or alter its linkage with the Yantai Municipal Government. Moody's believes the municipal government will retain its position as Wanhua's single largest shareholder.

Yantai State-owned Assets Supervision and Administration Commission — on behalf of the Yantai Municipal Government — directly owns 39.5% of Wanhua Industrial Group Company Ltd. (unrated), which in turn owns a 50.5% stake in Wanhua.

Wanhua Industrial Group Company's stake in Wanhua will fall to 47.1% after the planned equity placement.

The principal methodology used in these ratings 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., incorporated in Yantai, Shandong Province, is the world's largest producer of methyl diphenyl diisocyanate (MDI) products by capacity.

The company listed on the Shanghai Stock Exchange in 2001.

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

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.–PR_339433