OREANDA-NEWS. Fitch Ratings has affirmed Taiwan-based Advanced Semiconductor Engineering, Inc.'s (ASE) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable. The agency has simultaneously affirmed Anstock II Limited's 2.125% USD300m senior unsecured guaranteed notes due 2017 at 'BBB'. The notes are unconditionally and irrevocably guaranteed by ASE.

KEY RATING DRIVERS

Solid Market Position: ASE's ratings are underpinned by its market leadership in the USD27bn outsourced semiconductor assembly and testing (OSAT) industry with a 19% revenue market share, and by its integrated operations with its presence in the growing electronic manufacturing services (EMS) business segment. Within OSAT, ASE is the market leader in the copper wire-bonding industry with an established position in advanced packaging.

Improving Ratings Headroom: Fitch forecasts ASE's 2015 FFO-adjusted leverage to improve (2014: 1.95x, 2013: 2.3x, negative rating action guidance 2.0x) due to higher cash generation in line with a high single-digit revenue growth driven by the fast-growing system in package (SiP) business, despite lower profitability. Cash generation will also benefit from lower capex/revenue of 12%-13% (2014: 15.6%) in line with management's guidance as revenue mix changes towards EMS business which requires lower capex than OSAT.

Profitability under Pressure: We believe that ASE's 2015 EBITDA margin (2014: 21.8%) could face pressure due to inventory overstocking in 1H2015, softer sales volume of end-consumer products and the dilution effect of rising revenue contribution from the lower-margin EMS segment. However, ASE's continuous market share gains in OSAT and the weakening Taiwan dollar could support its profitability. ASE's profitability is among the highest in the OSAT industry thanks to higher capacity utilisation levels and technology leadership.

Cyclical & Capital Intensive Industry: ASE's ratings are constrained by the fixed-cost, capital intensive and inherently cyclical nature of the OSAT industry. Customer and product concentration also poses significant risks in the event of a downturn, when integrated device manufacturers and foundries could perform operations in-house instead of outsourcing to OSAT companies like ASE. However, ASE's integrated operations, its solution-led approach and strong financial metrics and flexibility mitigate such risks.

Minimal FCF on Rising Dividends: We forecast that ASE's 2015-16 FCF to be around 0.5%-1% (2014: Negative 0.9%) as CFO is likely to be consumed in capex and dividends. ASE is likely to raise dividends in line with its targeted 4% dividend yield on its stock. The high cash dividend policy will constrain the pace of deleveraging over the medium to long term.

Adequate Liquidity: At end-2014, ASE's unrestricted cash of TWD52bn and available undrawn committed facilities of TWD141bn were sufficient to fund its short-term debt of TWD44bn. Its liquidity coverage ratio improved to 4.4x (2013: 3.0x) at end-2014. Also, ASE has good access to capital markets as demonstrated by its US dollar issuances during 2013 and 2014. 

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to grow by high single-digit percentage in 2015, driven by growing SiP business.
- Operating EBITDA margin to decline by 50bp-100bp due to larger component of EMS business in revenue and intense price-based competition in advanced packaging.
- capex/revenue to decline to 12%-13% (2014: 15.6%).
- Minimal FCF as CFO is likely to be consumed in capex and dividends.

RATING SENSITIVITIES
Negative Rating Guidelines: Future developments that may, individually or collectively, on a sustained basis, lead to negative rating action include:
- operating EBIT margin below 5%, 
- FFO-adjusted leverage above 2.0x 
- negative FCF.

Positive Rating Guidelines: Future developments that may, individually or collectively, on a sustained basis lead to positive rating action include:

-Operating EBIT margin rises to above 10% (2014: 11.5%), 
-FFO-adjusted leverage falls to below 1.0x (2014: 1.95x), 
-Pre-dividend FCF margin rises above 7% (2014: 3%). 

However, Fitch is unlikely to consider an upgrade without a substantial increase in ASE's market share or reduction in business risk.

Full List of Rating Action:

Advanced Semiconductor Engineering, Inc.

- Long-Term Foreign-Currency IDR affirmed at 'BBB' 
- Senior unsecured rating affirmed at 'BBB'

Notes issued by Anstock II Limited

- 2.125% USD300m senior unsecured guaranteed notes due 2017 affirmed at 'BBB'.