OREANDA-NEWS. Fitch Ratings has published Taiwan-based Advanced Semiconductor Engineering, Inc.'s (ASE) National Long-Term Rating of 'A+(twn)'. The Outlook is Stable.

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.

Profitability under Pressure: We believe that ASE's 2015 EBITDA margin (2014: 21.8%) could face pressure due to softer sales of end-consumer products and rising revenue contribution from the lower-margin EMS segment. However, ASE's continues to gain market share in OSAT and the Taiwan dollar is weakening, which 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 and 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 ASE's 2015-16 free cash flow (FCF) margin to be around 0.5%-1% (2014: negative 0.9%) as cash flow from operations (CFO) is likely to be consumed by 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.

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 contribution by the EMS business to 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 by capex and dividends.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, on a sustained basis, lead to negative rating action include:
- operating EBIT margin below 5% (2014: 11.5%)
- funds flow from operations (FFO)-adjusted leverage above 2.0x (2014: 1.95x)
- negative FCF

Positive: Future developments that may, individually or collectively, on a sustained basis lead to positive rating action include:
- operating EBIT margin rises to above 10%
- FFO-adjusted leverage falls to below 1.0x,
- 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.

LIQUIDITY
Adequate Liquidity: ASE should have adequate liquidity. At end-September 2015, ASE's unrestricted cash of TWD42bn and available undrawn committed facilities of TWD149bn were sufficient to fund its short-term debt of TWD50bn. Also, ASE has good access to capital markets as demonstrated by its US dollar issuances during 2013 and 2014.