December 5, 2017 / 4:33 AM / a year ago

Fitch Removes RWN on ASE; Affirms at 'BBB', Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, December 04 (Fitch) Fitch Ratings has removed the Rating Watch Negative (RWN) on Advanced Semiconductor Engineering, Inc.'s (ASE) ratings. The Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating have been affirmed at 'BBB', while the National Long-Term Rating has been affirmed at 'A+(twn)'. The Outlook on the IDR and National rating is Stable. Simultaneously, Fitch has affirmed ASE's Short-Term IDR of 'F3' and National Short-Term Rating of 'F1(twn)'. The removal of the RWN follows the Chinese anti-trust authorities' conditional approval of ASE's planned acquisition of Siliconware Precision Industries Co., Ltd. (SPIL) on 24 November 2017. Anti-trust authorities in the US and Taiwan have already approved the acquisition, which will be done through the establishment of ASE Industrial Holding Co (Holdco) to own 100% of the equity interests in ASE and SPIL. The transaction is still subject to approval from the shareholders of ASE and SPIL, which could be obtained in February 2018. The rating actions also reflect Fitch's assessment that the Holdco's strong business risk profile, which is characterised by technology and market leadership and an ability to generate robust FCF, will offset its high pro forma FFO-adjusted leverage of 2.5x-2.7x in 2018. We are likely to assess ASE's ratings based on the consolidated credit profile of the Holdco because the two entities are likely to have strong operational and strategic linkages. The Holdco will issue a new share for every two shares held by the ASE's shareholders and will pay TWD51.2 in cash for each SPIL share. The offer for a 67% stake in SPIL, including the shares resulting from the likely conversion of SPIL's USD400 million outstanding convertible bonds, would cost around TWD120 billion (USD4 billion) in cash, 75%-80% of which will likely be funded by new debt. ASE's existing 33% stake in SPIL will be transferred to the Holdco. KEY RATING DRIVERS ASE Credit-Linked to Holdco: We will assess ASE's credit profile based on the consolidated profile of the Holdco, once it is established, because of strong linkages between the two entities. We have assessed the linkages between ASE and the Holdco as "weaker parent, stronger subsidiary and strong operational and strategic linkages", based on Fitch's Parent and Subsidiary Rating Linkage criteria. ASE will account for 72%-77% of the Holdco's consolidated pro forma revenue and EBITDA in 2018, and is likely to upstream all of its FCF to the Holdco. Stronger Business Risk Profile: Holdco will have a strong business profile, with about 29% revenue market share in the outsourced semiconductor assembly and testing (OSAT) industry, stronger technological capabilities, and the ability to pool resources to cater for the fast-growing "system-in-package" business. Fitch expects the Holdco to enjoy savings as it removes some duplication in capex and R&D spending, leading to higher FCF generation. However, these synergies may be offset by some revenue losses as some customers may diversify away from the combined group. Weaker Leverage: We estimate that the Holdco, on a consolidated pro forma basis, will have 2018 FFO-adjusted net leverage of around 2.5x-2.7x - higher than the average leverage of 'BBB' rated peers. We think consolidated lease-adjusted debt will be TWD200 billion-210 billion at end-2018 and EBITDA will reach TWD84 billion-86 billion in 2018. However, we forecast leverage to improve to below 2.3x during 2019-2020, supported by robust FCF generation and growing EBITDA. ASE's management intends to use FCF to deleverage. Solid FCF Generation: We forecast the Holdco, on a consolidated pro forma basis, will generate TWD25 billion-30 billion in FCF and CFO of TWD75 billion-80 billion in 2018, which will be sufficient to fund its annual capex of around TWD30 billion and dividends of TWD15 billion-18 billion. We believe that the Holdco will pay about TWD10 billion in interest and taxes. Low Single-Digit Revenue Growth: We forecast the Holdco's consolidated pro-forma revenue to increase by 3%-4% in 2018, in line with the industry growth rate and driven by stable smartphone-led packaging and testing demand. We also expect the Holdco's pro forma operating EBITDAR margin at 22%-23%, higher than ASE's standalone margin of 20%-21% as it will benefit from SPIL's higher margin of 28%-29% and cost savings. We also expect profitability to remain stable over the medium term, driven by improving profitability in ASE's electronic manufacturing services (EMS) segment, despite general industry pricing pressure. Improved Financial Performance: ASE's 9M17 financial performance was better than we expected, with EBITDA increasing to around TWD45 billion (9M16: TWD39 billion), driven by stable smartphone-led demand and solid revenue growth in the EMS business segment. ASE's gross debt fell to around TWD82 billion by end-September 2017 (end-2016: TWD111 billion), thanks to an equity rights issuance of TWD10 billion in March 2017. Gross margin in the EMS segment widened to around 11% in 9M17 (2016: 9.7%) due to better prices and cost savings. Stable 2018 Industry Outlook: We forecast stable credit quality for large semiconductor-backend companies, whose cash generation should benefit from a 3%-4% annual increase in communication device demand in 2018. We expect the industry's gross leverage to remain stable on lower but positive FCF. Industry CFO is likely to remain robust in 2018 as capex requirements hold steady. Most industry participants will continue to invest in SiP and wafer-level advanced packaging technologies to meet demand for lower form factor in end-user devices. We forecast the industry operating EBITDAR margin to remain stable, as cost savings and capacity utilisation improvements offset the continued 3%-5% annual decline in average selling prices. DERIVATION SUMMARY ASE's 'BBB' ratings will be based on the consolidated credit profile of the Holdco. The Holdco's business risk profile compares favourably with other 'BBB' rated semiconductor companies; it is a technology and market leader, has larger scale with revenue of USD12 billion-13 billion, EBITDA of around USD2.8 billion and FCF of USD800 million-1 billion. The Holdco's ability to pool the resources of ASE and SPIL will provide financial flexibility for capex and R&D spending, which will widen the technology gap with Amkor Technology, Inc. and STATS ChipPAC Pte. Ltd. (B+/Stable). The Holdco's business risk profile is better than that of STMicroelectronics N.V. (STM, BBB-/Positive), which is exposed to volatile demand for semiconductor chips and low pricing power in an industry dominated by Intel Corporation (A+/Stable) and Samsung Electronics Co., Ltd. (AA-/Stable). However, STM's weaker business risk profile is offset by its low FFO-adjusted leverage of around 1.0x and a net cash position. We expect the Holdco to deleverage given management's intention to use FCF to pay down debt. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the Holdco include: - Successful completion of the establishment and listing of the Holdco by end-May 2018 at the terms of the joint statement announced by both ASE and SPIL on 30 June 2016. - Revenue to grow by 3%-4% in-line with the industry. - Operating EBITDAR margin of 22%-23%. - Capex/revenue of 7%-9% with progressive savings in capex and R&D spend over the medium term. - Holdco to pay about TWD120 billion to acquire 67% stake in SPIL, 75%-80% of which is funded by debt. - Dividends of TWD15 billion-TWD18 billion. - No restrictions in upstreaming of dividends or other cash movements from SPIL and ASE to the Holdco. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Improvement in business profile and/or market power with significant like-for-like margin increases - FFO-adjusted leverage falls to below 1.0x on a sustained basis. Developments That May, Individually or Collectively, Lead to Negative Rating Action - Failure to achieve FFO-adjusted leverage below 2.3x by 2019. LIQUIDITY Adequate Liquidity: ASE's had unrestricted cash of TWD39 billion and available undrawn committed facilities of TWD5 billion as at end-September 2017, which was sufficient to pay for short-term debt of TWD33 billion. The holding company has a committed syndicated bank facility available to fund cash of TWD120 billion needed to acquire the remaining 67% stake in SPIL. We believe that ASE will have about TWD110 billion in lease adjusted debt and minimal debt at SPIL. Contact: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Kelvin Ho Director +85 2 2263 9940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable. 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