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Chi Mei's Rating Upgraded to Stable on Improving Leverage

2008/06/27 | By Ben Shen

Taipei, June 27, 2008 (CENS)--Taiwan Ratings Corporation (TRC) recently upgraded its "twA-" long-term credit rating on Chi Mei Optoelectronics Corp. (CMO) to stable from negative, as well as affirming its long-term "twA-" and short-term "twA-2" corporate credit ratings on the company.

The upgraded rating reflects TRC's expectation that better market conditions and CMO's continued market share gain will enable the company to further strengthen its cash flow, lower leverage, and enhance its cash flow protections measures over the next few quarters.

CMO generated NT$49.5 billion (US$1.63 billion at US$1:NT$30.3) in net income and NT$98.7 billion (US$3.25 billion) in EBITDA (earnings before interest, taxes, depreciation and amortization) in the three quarters ended March 31, 2008 due to improving market conditions and its timely capacity expansion. CMO's strong profitability enabled the company to lower its ratio of net debt to capital to 38.2% (adjusted for receivable factoring) as at March 31, 2008 from 42.4% at the end of 2006. Its ratio of adjusted funds from operations (FFO) to net debt also increased significantly to 59.2% in 2007, from 26.4% in 2006.

CMO reported the highest year-on-year revenue growth among its peers in 2007. The company's global market share in terms of capacity increased to 12.5% in 2007 from 11.4% in 2006. Further growth in its market share in 2008 is likely with higher capacities from its 6th and 7.5th generation plants. CMO's strengthening business scale, more balanced product mix, and stable market environments are likely to keep the company's profitability strong over the next two to three quarters, which will enable CMO to further reduce leverage, despite persistent product pricing pressure and its NT$100 billion capital expenditures plan for 2008.

Nevertheless, the company's credit protection measures are still likely to be somewhat volatile over the next two to three years, which is due to the typical industry risks, including high capital and technology intensities and commodity price competition, and CMO's somewhat aggressive capital spending policy.

The TRC said the long-term rating for CMO would be lowered if the company's adjusted ratio of net debt to capital exceeds 40% for an extended period of time. The rating could also be lowered if the company is unable to maintain its adjusted ratio of FFO to net debt above 30% potentially due to severe industry downturns or a rise in capital expenditures substantially beyond TRC's expectation. Conversely, the rating could be raised if the company can further increase its market share, achieve breakeven or better free operating cash flow and maintain its adjusted ratio of net debt to capital below 30% through business cycles.