Wanhua Chemical Group Upgraded To 'BBB' On Improved Scale And Diversity Following Restructuring; Outlook Stable


  • We expect Wanhua's restructuring plan in which it would purchase all of its parent's assets to proceed, now that the company has obtained all necessary approvals.
  • In our view, China-based Wanhua's leading position in the niche MDI market, expanded scale and geographical reach, and largely stable leverage following the restructuring will enhance its credit quality.
  • We are raising our long-term issuer credit rating on Wanhua to 'BBB' from 'BBB-'.
  • The stable outlook reflects our view that Wanhua will maintain its global leadership position in MDI, strong profitability, and a debt-to-EBITDA ratio of less than 2.5x over the coming two years.
HONG KONG (S&P Global Ratings) Nov. 26, 2018--S&P Global Ratings said today 
that it raised its long-term issuer credit rating on Wanhua Chemical Group Co. 
Ltd. to 'BBB' from 'BBB-'. The outlook is stable. 

Wanhua is the largest methylene diphenyl diisocynate (MDI) producer globally. 
The company is based in China's Shandong province.

We upgraded Wanhua because we expect the company's restructuring to enhance 
its operating scale and diversity. The resultant takeover of its parent's 
assets will help Wanhua consolidate its leading global position in the niche 
MDI market and reduce its concentration risk in China.

Wanhua's restructuring is likely to be completed by the end of the first 
quarter of 2019, given it has obtained all the necessary approvals. These 
approvals include those from the State-owned Assets Supervision and 
Administration Commission (SASAC), China Securities Regulatory Commission, 
Ministry of Commerce, and State Administration for Market Regulation. 

In our view, the inclusion of the parent's polyurethane business into Wanhua's 
portfolio will meaningfully increase its scale and geographical reach in the 
niche MDI market. The main asset being acquired is BorsodChem Rt (BC), a 
Hungary-based MDI producer. 

Based on Wanhua's results in the first six months of 2018, we estimate that 
the restructuring will increase the company's revenue by about 24% and its 
gross profit by about 32%. After the restructuring, Wanhua's total 
consolidated MDI capacity will increase by 17% to 2.1 million tons per annum, 
which is about 25% of the global capacity. Wanhua will also benefit from BC's 
existing toluene diisocyanate (TDI), polyvinyl chloride (PVC), and caustic 
soda operations.

Wanhua's geographical exposure to European markets will increase considerably 
after the inclusion of BC's operations. BC also has small operations in Africa 
and the Middle East among others. In our view, the expanded market reach would 
help mitigate Wanhua's concentration risks in China. 

We continue to believe that Wanhua's ongoing expansion in its downstream 
polyurethane business will support the company's performance over the next two 
years. Wanhua's plan to build an MDI facility with an annual capacity of 
400,000 tons in the U.S. will also improve the company's geographic diversity 
and increase the stability of its overall performance in the longer run. We 
estimate the capital expenditure for this project at US$1.25 billion. However, 
we do not expect any revenue contribution from the project before 2021.

We expect Wanhua's leverage and financial risks to remain relatively unchanged 
right after the restructuring. The company will issue shares for all of the 
parent's assets, and take on its debt, which is about Chinese renminbi (RMB) 
12.9 billion as of June 30, 2018. Our base case also considers Wanhua's 
planned capital spending for its MDI plant in the U.S., domestic ethylene 
project in China, and other downstream expansion projects. Based on those 
assumptions, we expect the company's debt-to-EBITDA ratio to be 1.4x-2.1x in 
2019-2020, from 1.0x in 2017. 

Under the new structure, Wanhua will be jointly held by five financial 
institutional investors, in addition to having public float. Yantai SASAC, 
through its investment vehicle Yantai Guofeng Investment Holding Co. Ltd., 
will remain Wanhua's single largest shareholder with about 21.59% stake 
post-restructuring. Yantai SASAC has guaranteed Wanhua's business 
independence, which includes asset, operational, and financial independence. 
We do not believe Yantai SASAC would negatively influence Wanhua's credit 
quality.

The stable outlook reflects our view that Wanhua will maintain its leadership 
and technology capability in the niche global MDI market. The outlook also 
reflects our view that Wanhua can maintain strong profitability and keep its 
debt-to-EBITDA ratio below 2.5x over the coming two years.

We may downgrade Wanhua if the company's profitability deteriorates 
significantly or its debt increases materially. A downgrade trigger could be 
Wanhua's debt-to-EBITDA ratio rising above 2.5x on a sustained basis. This may 
occur if the company's capital spending is more than we expect or MDI and 
chemical product margins become depressed for a prolonged period. 

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