(The following statement was released by the rating agency)
Jan 10 -
Summary analysis -- KCC Corp. ------------------------------------- 10-Jan-2013
CREDIT RATING: BBB/Stable/-- Country: Korea, Republic
Primary SIC: Construction
Mult. CUSIP6: 501255
Credit Rating History:
Local currency Foreign currency
10-Aug-2007 BBB/-- BBB/--
27-Jan-2004 BBB-/-- BBB-/--
Our ratings on Korea-based building materials maker KCC Corp. (KCC; BBB/Stable/--) reflect its leading position in domestic markets for major products it makes and its diverse product portfolio and customer network. The ratings also reflect solid measures of its credit quality, its strong liquidity, and its flexible business and financial policies. Constraining factors on the ratings are its exposure to cyclical downstream industries and its weak corporate governance.
Standard & Poor’s Ratings Services believes KCC’s leading market positions allow it to maintain relatively stable operating performance. The company has secured 40%-60% of domestic markets for products such as paint, glass, and other building materials. We expect the company’s long and close relationships with major customers such as Hyundai Motor Co. (HMC; BBB+/Stable/--) and Hyundai Heavy Industries Co. Ltd. (HHI; not rated) to help it maintain its leading shares in these markets.
In addition, the company’s diverse product portfolio and customer network in various industries helps ease fluctuations in its operating performance. A variety of the company’s products--such as those for construction, auto manufacturing, and shipbuilding--are exposed to different industries. The company also has a diverse network of customers in different industries, its largest customer accounting for only around 5% of total revenues.
We think solid measures of credit quality and strong liquidity enable KCC to endure cyclical demand from customers. We expect the ratio of the company’s debt to EBITDA to be below 3x over the next two years, commensurate with the current ratings, despite our expectation that weak demand from customers in the construction industry will continue. We also expect the company to maintain strong liquidity. The company has had relatively high levels of cash in addition to liquid investments, such as shareholdings of HMC and HHI.
We also view KCC’s active business policy and flexible financial policy as factors that help it navigate cyclicality in its major businesses. For example, facing significant deterioration in its polysilicon business, in which the company has spent the major portion of its capital expenditure, the company has discontinued its polysilicon manufacturing facility in Korea and has written off the value of the related assets. In our view, swift discontinuation considerably reduced KCC’s exposure to the highly cyclical and volatile polysilicon business. Also, we expect KCC’s free operating cash flow to improve modestly over the next two years given the company’s plan to cut its capital expenditure significantly during this period, which would demonstrate its flexible financial policy.
However, a constraint on KCC’s credit quality, in our view, is its exposure to fluctuating demand from the construction, auto manufacturing, and shipbuilding industries, which are reliant on domestic and global economic cycles. For example, weak domestic demand for construction has hurt the company’s profitability in the past two years, and we expect only modest recovery in demand over the next two years to result in continued low profitability in its building material business during the same period. Also, we see the recent global economic downturn weakening demand from auto manufacturing and shipbuilding industries.
In our opinion, another constraint on KCC’s credit quality is weak corporate governance. For example, the company has a poor history of corporate governance in relation to investments in Hyundai Group affiliates mostly unrelated to KCC’s core operations. In our view, this demonstrates the company’s weak corporate governance because the investments were in the interest of major shareholders rather than the company.
KCC’s liquidity is “strong,” as defined in our criteria. We expect the company’s sources of liquidity to exceed 1.5x uses over the next 12 months.
We assume KCC’s sources of liquidity will be as follows over the next 12 months:
-- Korean won (KRW) 412 billion in cash and short-term investments as of Sept. 30, 2012;
-- KRW909 billion in liquid investments, following a 20% reduction in book value as of Sept. 30, 2012; and
-- KRW342 billion in cash flow from operations.
We assume KCC’s uses of liquidity will be as follows over the next 12 months:
-- KRW226 billion in capital expenditures;
-- KRW857 billion in debt due to mature within a year of Sept. 30, 2012; and
-- Modest dividend distributions.
The stable outlook on KCC reflects our expectation that the company’s strong and stable positions in domestic paint and building material markets will enable it to maintain its “intermediate” financial risk profile.
We may lower the ratings if debt to EBITDA for KCC exceeds 3x on a sustained basis, likely as a result of weaker-than-expected profitability or larger-than-expected investments. Conversely, we may raise the ratings if the company improves its transparency in corporate governance and, at the same time, its debt (adjusted for lease and pension liabilities) to EBITDA falls below 1.5x for a protracted period, possibly as a result of much stronger operating performance than we expect.