Hong Kong, February 08, 2019 -- Moody's Investors Service has affirmed the A3 issuer rating of LG Chem,
Ltd.
The rating outlook remains stable.
This rating action is in response to the company's announcement
on 30 January 2019 that it would substantially increase capital spending,
mainly on its battery business.
RATINGS RATIONALE
"The rating affirmation reflects our expectation that LG Chem's
credit quality will remain broadly stable and within the parameters of
an A3 rating over the next 1-2 years, as its higher financial
leverage, stemming from large investments in its battery business,
will be largely offset by improving business diversity," says Wan
Hee Yoo, a Moody's Vice President and Senior Credit Officer.
According to LG Chem, the company plans to increase its capital
spending to KRW6.2 trillion in 2019 from KRW4.6 trillion
in 2018.
Moody's notes that its capital spending started to increase substantially
in 2018 and will remain elevated at least over 2019-21.
Such spending will be mainly used to increase its electric vehicle (EV)
battery capacity to accommodate large order backlogs from global auto
manufacturers and to build a new naphtha cracking center in Korea by mid-2021.
Given such investments and the sizable working capital deficits related
to its battery business, Moody's expects LG Chem's reported
debt to approximately double by year-end 2020 from KRW5.3
trillion at year-end 2018.
However, Moody's does not believe that the company will face
difficulties in raising external funds, given its strong access
to the banking and debt capital markets.
Consequently, despite a steady growth in EBITDA, mainly supported
by incremental earnings in its battery business, Moody's expects
LG Chem's adjusted debt/EBITDA to rise to around 1.9x in
2019 and 2.0x-2.2x in 2020. This level of
financial leverage is significantly higher than the average level of around
1.1x over the last three years.
Nonetheless, Moody's believes that LG Chem's investments
in EV batteries will materially improve its business diversity and overall
competitive strengths, given the company's strong competitiveness
in this business and good prospects for global EV battery demand.
According to LG Chem, the company has an EV battery order backlog
of around KRW80 trillion as of year-end 2018 from various global
auto manufacturers. In view of this situation and the acceleration
in the sales of EVs globally -- against the backdrop of
tightening environmental regulations and the improving economics of EVs
-- Moody's expects revenue from its battery business
to more than double by 2020 from KRW6.5 trillion in 2018.
LG Chem's profitability for the battery business should also improve
meaningfully, given the benefits from economies of scale and improving
pricing terms.
In this regard, Moody's estimates the EBITDA contribution
from LG Chem's non-petrochemical business to increase to
around 45% in 2020 from around 25% in 2018, which
will reduce its exposure to the cyclical petrochemical business.
Moody's notes that there remain a degree of execution risk in its
battery business, but that it would be largely manageable because
of its good track record and technological capabilities.
LG Chem's operating income fell by 23% to KRW2.2 trillion
in 2018 from its historical high of KRW2.9 trillion in 2017,
mainly caused by softer product spreads in its core petrochemical business.
Reported debt increased to KRW5.3 trillion by year-end 2018
from KRW3.0 trillion at year-end 2017 because of sizable
capital spending and working capital deficits. Consequently,
adjusted debt/EBITDA increased to around 1.5x in 2018 from 0.8x
in 2017.
The stable rating outlook reflects Moody's expectation that LG Chem will
quickly increase revenues and improve profitability in its EV battery
business, while maintaining stable operations in its petrochemical
business over the next 1-2 years.
Moody's does not expect LG Chem's rating to be upgraded over the
next 2-3 years, in view of its heavy capital spending program
during this period.
Upward pressure on the rating could arise over the longer-term
if the company meaningfully increases revenue and earnings in the EV battery
business through establishing a strong global market position, while
maintaining a robust financial profile, such that its adjusted debt/EBITDA
remains below 1.0x-1.25x on a sustained basis.
LG Chem's rating could face downward pressure if (1) the company experiences
major operating difficulties in its EV battery business or weaker-than-expected
industry conditions for its petrochemical business; or (2) its adjusted
debt/EBITDA exceeds 2.0x-2.25x for a prolonged period.
The principal methodology used in this rating was Chemical Industry published
in January 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
LG Chem, Ltd. is a major Asian producer of a diverse mix
of commodity and specialty chemicals, including olefins, polyolefins,
ABS, engineering plastics, acrylate, plasticizers,
synthetic rubbers, PVC and specialty polymers. The company
is also a manufacturer of rechargeable batteries -- including electric
vehicle (EV) batteries -- LCD panel materials and pharmaceutical
products.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
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For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
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to rated entity, Disclosure from rated entity.
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077