Fitch Ratings-Singapore/Jakarta-23 October 2017: Fitch Ratings has assigned Indonesia-based PT Chandra Asri Petrochemical Tbk (CAP) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB-'. The Outlook is Stable. The agency has also assigned CAP's proposed senior unsecured US dollar notes an expected rating of 'BB-(EXP)'. At the same time, Fitch Ratings Indonesia has also assigned a National Long-Term Rating of 'AA-(idn)' with a Stable Outlook.

CAP's rating reflects its leading market position as the largest petrochemical producer in Indonesia, supported by its integrated operations and more diverse product offerings compared with its domestic peers, favourable long-term industry prospects in Indonesia, the cyclical nature of the petrochemical industry and its strong financial profile.

The proposed notes will rank pari passu with other senior unsecured borrowings of CAP and its subsidiaries. The final rating on the proposed notes is contingent upon the receipt of documents conforming to information already received.

'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.

KEY RATING DRIVERS

Leading Market Position: CAP's credit profile benefits from its leading market position as the largest petrochemical producer in Indonesia, accounting for about 35% of the country's olefin and polymer production capacity. CAP is also the only producer of butadiene and styrene monomer and one of the top two producers of propylene and polyethylene in Indonesia. CAP's market position is also aided by operations that are relatively better integrated than its domestic peers, a diversified customer base, proximity to some of its key customers and good infrastructure including customer pipeline connectivity.

Integrated Operations, Improved Profitability: We believe CAP's integrated operations enable it to diversify its product offerings and improve operational efficiencies - delivering higher profitability - relative to its peers. In our view, the expansion of CAP's naphtha cracker unit in late-2015 has improved its integration and has enabled it to capture value chain benefits while meeting the majority of its input requirements, along with its captive power plants. The plant's location, close to many of its key customers with pipeline connectivity, also supports its higher realisations and profitability. CAP is also setting up a synthetic rubber plant jointly with Compagnie Financiere Du Groupe Michelin, which is expected to start operations in 1Q18, enabling the company to further improve downstream integration.

Strong Financial Profile: We expect CAP's financial profile to remain strong over the medium term despite its large capex plans. CAP benefits from the strong operating cash flows from its expanded naphtha cracker and improving downstream integration. We expect CAP's financial profile to improve further in 2017, with a turnaround to a net cash position, supported by strong operating cash generation and USD378 million raised from its recently completed rights issue.

However, we expect CAP's net cash position to reverse over the medium term due to its large investment plans, although its key credit metrics will remain strong over the medium term. We expect FFO adjusted net leverage to remain below 1x (2016: 0.2x) and FFO fixed charge cover to stay above 9x (2016:14.2x) through 2020.

Large Investments to Continue: CAP plans to invest about USD1 billion till 2019 to increase the capacity of its downstream products. This includes its plans to add a new polyethylene plant while also increasing the capacity of its existing polypropylene and butadiene plants. We believe these investments will continue to support CAP's growth over the medium term and its leading market position. The company may also consider a second petrochemical complex; however, in the absence of a firm plan, we have factored in only a minimal investment in our analysis.