china national bluestar (group) co., ltd. · china national bluestar (group) co., ltd.’s...

CORPORATES

CREDIT OPINION30 June 2017

Update

RATINGS

China National Bluestar (Group) Co., Ltd.Domicile Hong Kong

Long Term Rating Baa2

Type LT Issuer Rating - FgnCurr

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Li Ma 86-21-2057-4018MD-Corporate [email protected]

Jiming Zou 86-21-2057-4018VP-Senior [email protected]

Gerwin Ho 852-3758-1566VP-Senior [email protected]

Danny Chan 86-21-2057-4033Associate [email protected]

Peter Choy 852-3758-1466Senior Vice [email protected]

China National Bluestar (Group) Co., Ltd.Updates Following ChemChina's Acquisition of Syngenta

Summary Rating RationaleChina National Bluestar (Group) Co., Ltd.’s (Bluestar) Baa2 issuer rating reflects itsfundamental credit profile and a three-notch uplift based on our expectation that thecompany will receive strong support from its parent, China National Chemical Corporation(ChemChina, Baa2 negative), in times of need due to Bluestar's (1) majority ownership byChemChina; (2) significant contribution to ChemChina’s sales and earnings; and (3) closefinancial links with ChemChina.

Bluestar's fundamental credit profile reflects the company's (1) diversified specialty chemicalproducts portfolio, with strong market positions and high barriers to entry; (2) long-termgrowth prospects due to solid domestic demand for animal nutrition, environmental scienceand silicon products; (3) elevated debt leverage after earnings moderation; and (4) evolvingorganizational structure.

Credit Strengths

» Diversified specialty chemical products portfolio, with strong market positions

» Good long-term growth prospects

» Strong parental support

Credit Challenges

» Elevated debt leverage

» Evolving organizational structure

Rating OutlookThe negative outlook on Bluestar's issuer rating primarily captures (1) ChemChina's negativeoutlook; and (2) the pressure on Bluestar's fundamental credit profile given its elevated debtleverage.

Factors that Could Lead to an UpgradeAn upgrade is unlikely, given the negative outlook. The outlook would return to stable if (1)ChemChina's outlook stabilizes; and (2) Bluestar reduces its own leverage.

Factors that Could Lead to a DowngradeBluestar’s rating would be downgraded if (1) its operating performance and financial profiledeteriorate; (2) ChemChina’s support to the company weakens as a result of a deteriorationin ChemChina’s credit profile, or if its ownership in Bluestar declines substantially.

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Key financial indicators for a downgrade include its adjusted debt to EBITDA ratio is more than 7.0x.

Key Indicators

Exhibit 1

KEY INDICATORS [1]

12/31/2016 12/31/2015 12/31/2014 12/31/2013 12/31/2012

Revenues (USD Billion) $6.9 $7.7 $8.3 $7.7 $7.9

PP&E (net) (USD Billion) $4.8 $4.6 $5.0 $6.5 $6.9

EBITDA Margin % 18.3% 20.4% 12.5% 9.4% 9.0%

ROA - EBIT / Average

Assets

5.3% 7.7% 3.8% 1.2% 1.1%

Debt / EBITDA 7.1x 5.5x 7.1x 11.0x 10.6x

EBITDA / Interest Expense 3.5x 3.6x 2.4x 1.6x 1.7x

Note: [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.Source: Moody's Financial Metrics™

Detailed Rating ConsiderationsDiversified specialty chemical products portfolio and strong market positionBluestar's revenue is geographically diversified due to its overseas acquisitions from 2006 to 2014, such as Adisseo, Qenos, RhodiaSilicones, Elkem and REC Solar. About 63% of the company's revenue in 2016 came from overseas markets.

Many of Bluestar's products benefit from high barriers to entry due to proprietary technologies, high upfront investments, and stringentenvironmental and safety requirements in production processes.

Bluestar's product portfolio is also diversified and managed under three segments: nutrition science, new chemical materials, andbasic chemicals and intermediates. The first two segments mainly produce specialty chemicals and accounted for about 72% of thecompany's revenue in 2016. A large number of products in these two segments have broad applications in end markets such as animalnutrition, electronics, construction, automotive, aerospace, clean energy, water treatment and packaging. This end-user diversificationreduces revenue volatility. The large specialty chemical portfolio also enhances the company's importance in the domestic industry.

Besides specialty chemicals, the company produces petrochemicals and downstream products, such as polyethylene, propylene,polyether, engineering plastics, phenol and acetone, and acrylic ester. These products contribute large revenue, but lower profits.

Bluestar has global leadership position in several product lines:

(1) Adisseo, a company Bluestar acquired in 2006, is the world's second-largest producer of methionine, an essential amino acidmainly used by poultry producers. Adisseo has high profitability because of its patented technology and the backward integration ofits production process. It is the company's largest revenue and profit contributor, accounting for 22% of Bluestar’s revenue and 50% ofEBITDA in 2016.

(2) Bluestar is among the top three global players in upstream and downstream silicon products, which accounted for 33.3% of thecompany's revenue and about a quarter of EBITDA in 2016. Bluestar acquired Elkem in Norway in 2011 and Rhodia Silicones in Francein 2006. Elkem and Rhodia Silicones employ leading technologies and produce specialty products for metallurgy, coating, elastomersand health care, which help offset the losses from Bluestar's China monomers silicon operations due to global oversupply.

(3) The company is also one of the three largest global producers of ion-exchange membrane electrolyzers, with rich experience inenvironmental science business, specializing in water treatment and industrial cleaning. However, this business has a small scale andcontributes limited revenue and gross profits to the company.

(4) Bluestar is one of the largest global producers of PVC paste resin and polyphenyl ether.

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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 June 2017 China National Bluestar (Group) Co., Ltd.: Updates Following ChemChina's Acquisition of Syngenta


(5) The company also acquired Qenos in 2006, the largest polyethylene producer in Australia.

Good prospects for long-term business growthBluestar exhibits good long-term growth prospects. We expect growth in its animal nutrition, environmental science and siliconbusinesses due to favorable domestic demand for specialty chemicals.

Rising rates of poultry consumption and the industrialization of poultry production in emerging markets will drive demand formethionine, particularly in countries with large populations, such as China. In 2013, Adisseo completed a RMB4 billion methionineproduction facility in China, one of the largest globally. The additional production capacity has significantly improved the company'searnings and cash flow. We expect Adisseo to maintain its competitiveness and achieve a strong gross margin in excess of 30%, as itexhibits the most backward-integrated production system and lowest cost base in the methionine industry.

Bluestar will also have good growth from its water treatment activities, including seawater desalination, which help to resolve watershortage problems across many regions in China.

In addition, we expect operational efficiencies in Bluestar's silicon supply chain to continue to improve. Since 2009, the companyhas invested about RMB6 billion in its domestic operations to broaden its product offerings for both downstream and upstreamsilicon products. As downstream silicon products have high requirements in terms of product performance, the cooperation betweenBluestar's domestic and overseas operations will help the company meet quality requirements and improve its domestic sales of siliconproducts.

Strong parental support from ChemChinaOur expectation of strong support from ChemChina is underpinned by the following factors:

(1) Bluestar's majority (63.6%) ownership by ChemChina.

(2) Bluestar's important role as the core platform in carrying out ChemChina's strategy of innovation and investments in specialtychemicals.

(3) Bluestar's significant contribution to the sales and earnings of ChemChina. In 2016, the company accounted for about 16%, 28%and 29% of ChemChina’s revenue, adjusted total debt and adjusted EBITDA, respectively.

(4) The strong financial connections between Bluestar and ChemChina. As of the end of 2016, ChemChina guaranteed about RMB21billion, or 38% of Bluestar's reported debt.

Elevated debt leverageBluestar's adjusted debt to EBITDA ratio increased to 7.1x in 2016 from 5.5x in 2015. The company issued substantial amount ofdomestic bonds in 2016 to refinance some of its short-term borrowings and to improve its liquidity position. The increase in gross debtwas almost equivalent to the increase in the cash balance in 2016. We expect Bluestar to deploy its excess cash for debt repaymentsand lower its ratio of adjusted debt to EBITDA to 6.0x-6.5x in the next 12-18 months, which will help to improve the company'sstandalone credit profile.



Exhibit 2

Debt/EBITDA Will Remain Elevated over the Next 12-18 Months Due to Weakened Earnings

10.6x11.0x

7.1x

5.5x

7.1x

6.0x-6.5x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2012 2013 2014 2015 2016 2017E

Adj. Debt / EBITDA

Sources: Moody's Financial Metrics™, Moody's Investors Service estimates

Earnings moderation in 2016 also negatively affected debt leverage. In 2016, Bluestar recorded a 0.8% decline in revenue and an 11%decline in adjusted EBITDA, mainly because of a significant price reduction in Adisseo's methionine products of about 33% on anannual basis. We expect the company's profitability (measured by EBITDA margin) to likely range between 17%-18% over the nextone to two years, compared with 18.3% in 2016, considering the persistent pricing pressure at Adisseo. Bluestar's EBITDA margin willremain higher than the level of 9%-13% in 2011-14, thanks to the ramp-up of profitable chemical products and the restructuring ofloss-making operations.

Exhibit 3

EBITDA Margin, Despite Recent Moderation, Will Remain Higher Than in the Past

9.0% 9.4%

12.5%

20.4%

18.3% 17%-18%

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015 2016 2017E

EBITDA Margin %

Sources: Moody's Financial Metrics™, Moody's Investors Service estimates

Bluestar’s overseas investments in the past few years have strengthened its product lineup and technology, which in turn will supportprofitability over the medium term. The overseas companies that produce specialty chemicals operate independently and the originalmanagement teams have remained intact to ensure smooth business continuity. The combination of overseas expertise in specialtychemicals and large Chinese demand, as evidenced by the ramp-up of Adisseo’s methionine production in Nanjing in the last two years,has substantially improved Bluestar’s profitability.

Bluestar's domestic operations still face fierce price competition in many product categories, such as silicon monomers, engineeringplastics, phenol and acetone, acrylic ester, and petrochemicals. The company's domestic businesses operate at relatively low utilizationrates due to lack of competitive products, lags in product launch schedules and excessive production capacity in China.

Bluestar's selling, general and administrative expenses accounted for about 13%-15% of sales in 2011-16. This level is high comparedwith that of its global peers, reflecting the challenges the company faces in rationalizing the operations of its large number of operatingsubsidiaries both in China and overseas.



Evolving organizational structureBluestar’s organizational structure is still evolving due to large number of geographically dispersed and separately managed subsidiaries.Consequently, synergies achieved so far have been very limited.

Founded through business combinations and acquisitions, Bluestar owns a large number of subsidiaries in and outside China. Thesesubsidiaries focus on different products and have geographically widespread production locations. There are also constraints ontechnology transfers from Bluestar's overseas companies to its domestic subsidiaries.

Bluestar’s management aims to improve resource allocation, create synergies and attract new capital from investors. Both of thecompany's listed subsidiaries, Bluestar Adisseo Co., Limited and Shenyang Chemical Industry, have finished restructuring, includingasset disposals to and asset injections from the parent. We believe similar transactions will emerge from time to time.

Liquidity AnalysisBluestar improved its liquidity in 2016, reducing short-term debt by RMB4.0 billion to RMB21.0 billion and increasing cash balance byRMB5.8 billion to RMB17.7 billion. However, the company's cash balance was still inadequate to cover its short-term debt as of the endof 2016.

Nevertheless, we expect Bluestar to be able to refinance its short-term debt, given its status as a subsidiary of a state-owned companyand its access to a large amount of credit facilities provided by large state-owned financial institutions.

Structural ConsiderationsWe have not notched down Bluestar’s rating for structural subordination.

The company is majority-owned by ChemChina, which is in turn 100%-owned by the State-owned Assets Supervision andAdministration Commission under the State Council of China. We expect the strong financial support from the government throughChemChina to help mitigate the risk of structural subordination for creditors at the holding company level.

ProfileChina National Bluestar (Group) Co., Ltd. produces a wide range of chemical products, including silicon upstream and downstreamproducts, methionine, water treatment solutions, and polyethylene and petrochemical products. The company generated RMB47.7billion of revenue in 2016.

The company is 63.6%-owned by China National Chemical Corporation (Baa2, negative), which in turn is one of the largest chemicalcompanies in China and is 100%-owned by the State-owned Assets Supervision and Administration Commission under the StateCouncil of China (A1 stable).

Rating Methodology and Scorecard FactorsThe Global Chemical Industry rating methodology indicates a Ba2 grid outcome for Bluestar's fundamental credit profile based onforward-looking financials for 2017. While the company has a large business scale and product diversity, it shows weaknesses in cashflow generation and debt leverage.



Exhibit 4

Rating FactorsChina National Bluestar (Group) Co., Ltd.

China National Bluestar (Group) Co., Ltd. -Private 2017 (E)

Global Chemical Industry Rating Methodology Grid

[1][2]

Aaa Aa A Baa Ba B Caa-C

Factor 1: Scale (20%)

a) Revenues (USD Billion) X

b) PP&E (net) (USD Billion) X

Factor 2: Business Profile (20%)

a) Business Profile X

Factor 3: Profitability (10%)

a) EBITDA Margin % X

b) ROA - EBIT / Average Assets X

Factor 4 : Leverage & Coverage (30%)

a) Debt / EBITDA X

b) EBITDA / Interest Expense X

c) Retained Cash Flow / Debt X

Factor 5 : Financial Policy (20%)

a) Financial Policy X

Rating:

Indicated Rating from Grid Ba2

Final Rating Baa2

(Incl. 3

notches

uplift)

Note: [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. ; [2] This represents Moody’s forward view,not the view of the issuer.Source: Moody's Investors Service estimates

Ratings

Exhibit 5Category Moody's RatingCHINA NATIONAL BLUESTAR (GROUP) CO., LTD.

Outlook NegativeIssuer Rating Baa2

PARENT: CHINA NATIONAL CHEMICALCORPORATION

Outlook NegativeIssuer Rating Baa2

BLUESTAR FINANCE HOLDINGS LIMITED

Outlook NegativeBkd Senior Unsecured -Dom Curr Baa2

Source: Moody's Investors Service



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REPORT NUMBER 1074361


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Contacts

Li Ma 86-21-2057-4018MD-Corporate [email protected]

Jiming Zou 86-21-2057-4018VP-Senior [email protected]

Gerwin Ho 852-3758-1566VP-Senior [email protected]

Danny Chan 86-21-2057-4033Associate [email protected]

Peter Choy 852-3758-1466Senior Vice [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


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