Tris Rating has assigned Thai Wah Plc (TWPC), Thailand's top vermicelli and tapioca maker, a BBB rating with a stable outlook.
The rating is based on TWPC's various strengths, from its sound balance sheet to its proficiency in producing high value-added (HVA) products. However, these factors are offset by the cyclical nature of commodities such as tapioca, the seasonal availability of cassava roots, which tapioca is extracted from, and potential changes in trade barriers.
TWPC has been operating in Thailand for 70 years and is the third-largest exporter of tapioca starch in the country, with a 7%-9% market share, according numbers submitted to the Commerce Ministry. The company is also the largest producer of vermicelli and rice noodles in Thailand, with a 35% market share.
In 2017, TWPC's sales of native starch were 50% of total revenue, while sales of HVA products made up 30%, and vermicelli and related products comprised the remaining 20%. In recent years it has added more HVA products and expanded its market presence globally.
Tris sees TWPC as moderately diversified with China, which makes up 50%-60% of export sales, followed by Taiwan with 20%-25%. Its eight tapioca factories operate in three countries -- Thailand, Vietnam and Cambodia -- producing a total of 485,000 tonnes of product per year.
The company needs to penetrate new export markets for tapioca if it wants to offset a concentration risk caused by an over-reliance on the Chinese and Taiwanese export markets.
Tris also raised concerns over the volatile profitability in the tapioca market. In 2016, actions by the Chinese government to unload its corn supply resulted in an oversupply of tapioca in Thailand. Then in 2017, the price of tapioca shot up 25% when farmers switched from tapioca to sugar cane, causing supply to fall. Tris expects the raw material cost in producing tapioca to remain high in the next few years.
Tris expects TWPC to remain stable as a company by maintaining a competitive position in the tapioca and vermicelli markets. Diversification of products will likely offset the problems caused by volatile tapioca prices, the rating agency said.
TWPC's rating could be upgraded if the company continues to add more products to its roster while keeping its level-headed fiscal policy. The rating could fall if earnings fall short of expectations or if a global tapioca shortage threatens operations.
