Fitch Places Sinofert's 'A-' IDR on Rating Watch Negative

Sinofert Holdings

09/01/2020 08:27

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-January 09: 

Fitch Ratings has placed China-based fertiliser company Sinofert Holdings 
Limited's (Sinofert) Long-Term Foreign- and Local-Currency Issuer Default 
Ratings (IDRs) and senior unsecured rating of 'A-' on Rating Watch Negative 
(RWN).

The rating action follows Sinofert's announcement on 5 January 2020 that its 
parent, Sinochem Hong Kong (Group) Company Limited (Sinochem HK; A/Stable) has 
agreed to transfer its entire 52.65% stake in Sinofert to a 100% owned 
subsidiary of China National Chemical Corporation (ChemChina; A-/Stable) for 
USD1. 

Sinofert was previously rated one notch lower than its parent Sinochem HK, 
reflecting their strong linkages in line with Fitch's Parent and Subsidiary 
Rating Linkage criteria. The RWN reflects the potential change in Sinofert's 
ultimate parent (ChemChina is rated one notch lower than Sinochem HK) and the 
pending final corporate structure, which may or may not affect the Sinofert's 
existing business and financial profile.

Fitch expects to resolve the RWN upon completion of the transaction, which may 
take longer than six months.

Key Rating Drivers

Reorganisation of Assets: On 5 January 2020, ChemChina and Sinochem HK said they 
would consolidate their agricultural assets into a new holding company called 
Syngenta Group Co., Ltd. that will be wholly owned by ChemChina. ChemChina 
intends to inject its 100% stake in Syngenta A.G. (BBB/Stable) and its 74.02% 
shareholding in ADAMA Ltd. into Syngenta Group. At the same time, Syngenta Group 
plans to acquire Sinofert from Sinochem HK. The moves are aimed at deepening the 
reform of China's state-owned enterprises and for the Sinochem Group and 
ChemChina to strengthen their cooperation.

Parental Linkages Drive Ratings: Sinofert is one of China's largest importers, 
distributors and manufacturers of fertiliser by revenue and volume. ChemChina is 
the nation's largest chemical company by revenue and operates along the entire 
value chain, including oil refining, petrochemical processing, basic and 
specialty chemicals, agrochemicals, tyres and chemical equipment manufacturing. 

In particular, ChemChina is the world's largest crop-protection producer and 
third-largest seed producer. Fitch expects Sinofert's new parent to continue to 
support its operations to ensure China's food safety and upstream food supply.

Extensive Distribution Network: Sinofert owns over 30,000 stores across China 
that cover 95% of domestic arable land. The company not only sells fertilisers 
and pesticides to farmers through this network, but also promotes scientific 
fertilising and agricultural services to drive the development of modern 
agriculture. In Fitch's view, Sinofert's dominant position in the downstream 
product distribution business in China complements ChemChina's upstream 
agrochemical business, comprising RD and production of seeds, fertiliser and 
crop protection, mainly through Syngenta and ADAMA. 

Before ChemChina acquired Syngenta in 2017, Syngenta generated less than 5% of 
its total sales in China. Syngenta is now making inroads into China's seeds, 
fertiliser and crop protection markets and should benefit substantially if it 
can take advantage of Sinofert's distribution channel. This is consistent with 
China's strategy of enhancing agricultural yields, minimising use of low-end 
crop protection products (therefore reducing environmental pollution and 
increasing food safety) and becoming self-sufficient in food supply.

Improving Credit Profile: Sinofert's FFO adjusted net leverage fell to 3.0x by 
end-2018, driven by improved profitability and gains from the disposal of a 
20.52% stake in Qinghai Salt Lake Industry Co Ltd. We expect Sinofert to 
maintain low leverage, with FFO net leverage below 2.5x in the next three years 
due to stable profitability. This forecast does not take into account potential 
synergies from the change in parent. 

Fitch believes Sinofert's business profile will benefit from vertical 
integration within the new Syngenta Group, although the transaction and the 
final corporate structure of Syngenta Group is still pending.

Derivation Summary

Sinofert's ratings are comparable with that of Sinochem International 
Corporation (SIC, A-/Stable). SIC and Sinochem HK are owned by Sinochem 
Corporation and their ratings are derived from our assessment of the 
creditworthiness of their parent. Sinofert's fertiliser business and SIC's 
crop-protection and agrochemical business are the two main pillars of Sinochem 
Group's agricultural segment and they share equal levels of strategic and 
operational importance within the group.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue to increase at 4.8% CAGR during 2019-2021

- EBITDA margin to stay at 3.0% during 2019-2021

- Capex of CNY1.0 billion, CNY800 million and CNY800 million in 2019, 2020 and 
2021, respectively

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Removal of the 
Negative Watch

- We will remove the Rating Watch Negative and affirm the ratings if the 
transaction is not completed and provided the linkages between Sinofert and 
Sinochem HK remain the same

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- We will downgrade Sinofert to 'BBB+' upon completion of the transaction and 
provided the strength of linkages between Sinofert and ChemChina are at a level 
similar than that of Sinofert and Sinochem HK previously

- We will also reassess Sinofert's positioning within ChemChina and whether the 
final shareholding structure would affect the current notching

Liquidity and Debt Structure

Adequate Liquidity: Sinofert had available cash of around CNY2.4 billion against 
short-term debt of CNY4.1 billion at end-June 2019. In addition, Sinofert had 
unutilised banking facilities in excess of CNY22 billion, which we believe would 
be preserved post-transaction as its new parent company, ChemChina, is also a 
highly regarded state-owned enterprise in China.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Sinofert Holdings Limited; Long Term Issuer Default Rating; Rating Watch On; A-; 
RW: Neg

; Local Currency Long Term Issuer Default Rating; Rating Watch On; A-; RW: Neg

----senior unsecured; Long Term Rating; Rating Watch On; A-; RW: Neg

Contacts: 

Primary Rating Analyst

Andrew Chan, 

Director

+852 2263 9559

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Alan Jiang, 

Associate Director

+852 2263 9989

Committee Chairperson

Laura Zhai, 

Senior Director

+852 2263 9974

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019)

https://www.fitchratings.com/site/re/10100477

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019)

https://www.fitchratings.com/site/re/10089196

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

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https://www.fitchratings.com/site/pr/10107054#solicitation

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https://www.fitchratings.com/regulatory

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