Published on 30 Jul 2021.
RAM Ratings has assigned a preliminary rating of AAA(fg)/Stable to Hanwha Q CELLS Malaysia Sdn Bhd’s (HQC) proposed RM150 mil Guaranteed Medium-Term Notes (2021/2024) (proposed MTN). The rating reflects the credit enhancement provided to the notes by an irrevocable and unconditional guarantee from Credit Guarantee Investment Facility (CGIF, rated AAA/P1 by RAM).
HQC is a manufacturer of solar photovoltaic (PV) cells and modules in Malaysia, with respective production capacities of 2.11 GW and 1.84 GW as at end-December 2020. HQC is indirectly wholly owned by Hanwha Q CELLS Co. Ltd (Hanwha Q CELLS), the solar arm of Hanwha Solutions Corporation (the Group). Based in South Korea, with operations worldwide, the Group is also involved in sectors such as chemicals and advanced materials.
Excluding the guarantee, HQC’s credit profile is strong, considering its very close relationship with Hanwha Solutions. HQC is a key manufacturing and research and development (R&D) arm of Hanwha Q CELLS, with Malaysia being one of the Group’s four manufacturing and R&D sites globally. HQC rides on its parent’s renowned product technology and solid branding within the global solar sector. Consistently ranking among the 10 largest PV module manufacturers globally, Hanwha Q CELLS is the top player in advanced countries such as the US, Germany, the UK and Japan. As a contract manufacturer of Hanwha Q CELLS, HQC’s products are mostly sold internally, with quantities typically fixed and the selling price marked up at a given rate to production cost. As such, HQC’s operating profit before depreciation, interest and tax margin has been fairly stable at 10%-11% in the past three years. Bulk of the receivables stem from related parties, but it is not a concern given the Group’s strong credit standing.
HQC’s credit profile is moderated by a highly leveraged balance sheet due to the capital-intensive nature and high R&D costs of solar PV operations. As at end-December 2020, its debts stood at RM1.44 bil, translating into an aggressive gearing ratio of 2.84 times. Of this total, RM241 mil comprised advances from Hanwha Solutions while the rest carry corporate guarantees from the Group. HQC’s liquidity profile is also weak, with short-term debts exceeding cash buffers in the past five years. HQC’s debt coverage is however adequate, with a funds from operations debt cover (FFODC) of 0.14 times-0.20 times in the past few years, while interest coverage was a healthy 2.50 times last year. We expect the FFODC to remain around historical levels as the uptick in debts from the issuance of the proposed MTN will be balanced by more robust sales after the retrofitting of HQC’s facilities is completed.
HQC’s business viability depends on Hanwha Solutions’ ability to maintain its market position in the global solar PV sector. The market is competitive, with periods of oversupply putting pressure on selling prices. Players must continuously invest in R&D efforts to keep up with technological innovations. Government renewable energy targets and policy support also affect the sector’s prospects to a great extent. The Group is vulnerable to the prices of raw materials, particularly polysilicon.
Hanwha Solutions’ credit profile is sound on account of its strong position within the global solar sector and the South Korean petrochemical sector, as well as its diversified presence globally. Its balance sheet is healthy, with gearing and net gearing standing at a respective 0.69 times and 0.35 times as at end-March 2021. The Group’s FFODC has been an adequate 0.14 times-0.20 times in the past three years. Barring major debt-funded acquisitions, the FFODC should stay at around 0.20 times as higher profit is tempered by a heavier debt load for capital expenditure. Moderating its credit profile are the Group’s ambitious plans for its solar business and new hydrogen ventures, as well as its exposure to the solar market and the volatile petrochemical sector. Hanwha Solutions’ evolving corporate structure due to various corporate exercises in recent years also constrains analysis.
Karin Koh, CFA
(603) 3385 2508
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Hanwha Q CELLS Malaysia Sdn Bhd