Hankyung Research "Hanwha Total Credit Rating Outlook Changed from Stable to Negative"

Deterioration of Operating Cash Flow Due to Business Downturn
Increased Investment and High Dividend Burden Also Weigh on the Company

[Asia Economy Reporter Minji Lee] Korea Ratings maintained Hanwha Total's rating at AA but changed the outlook from stable to negative on the 7th. The downgrade in outlook was attributed to the deterioration of operating cash flow due to the downturn in the industry, and the increase in financial leverage caused by expanded investments and dividend burdens.

Since the second half of 2018, the expansion of North American Ethane Cracking Capacity (ECC) and the supply-demand deterioration caused by the US-China trade dispute have intensified, leading to shrinking margins for major products. In particular, the decline in margins for Polyethylene (PE) and Styrene Monomer (SM) was cited as the main reason for the decrease in profit generation.

In 2019, due to the downturn in the industry, profitability fell below the average level of Naphtha Cracking Capacity (NCC), significantly worsening operating cash flow generation.

Yoo Jun-wi, Senior Researcher at Korea Ratings’ Evaluation Team 2, stated, “It is understood that the company recorded an operating loss in the first quarter of this year,” and added, “Last year, the company’s EBITA margin was 8.6%, down from 16% during the industry’s boom period.”

The increase in financial leverage was also significantly influenced by expanded investments and dividend burdens exceeding operating cash flow. The net debt to EBITA ratio was 2.6 times last year, higher than 0.8 times in 2017. The debt dependency ratio rose to 36.6% from 25.9% in 2017. The expansion of PP and NCC side crackers and facility investments resulted in a heavy financial burden for investments. Last year, capital expenditures amounted to 726.4 billion KRW, about 1.9 times the average of 376.4 billion KRW from 2015 to 2017.

While the industry outlook has turned negative, continuous dividend payments to shareholders as a joint venture (JV) also increased financial burdens. On a consolidated basis, the dividend payout ratio was 75% (616.9 billion KRW) in 2018 and 99% (318.0 billion KRW) in 2019, maintaining a high dividend policy.

Researcher Yoo Jun-wi explained, “Due to global economic slowdown, demand contraction caused by the COVID-19 impact, and China’s capacity expansions, margin weakness is expected to continue, leading to prolonged deterioration in operating cash flow generation. If the financial burden from large-scale expansion investments and high dividend policies continues, the financial strain is likely to persist.”

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