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Ratings on Taiwan Sugar Affirmed; Outlook Stable
RATIONALE The ratings continue to reflect TSC's very strong liquidity position, underpinned by a net cash position of NT$38 billion as at the end of 2004; its ample availability of low-cost land; and the 96.6% shareholding of the Taiwan government (rated AA-/Negative/A-1+ by Standard & Poor's Ratings Services). Factors partially offsetting these strengths include the increase in competition as a result of market deregulation; the continuing losses of TSC's sugar business, partly because of its policy role; and the company's relatively high, albeit improving, cost structure as a result of government-imposed constraints on state-owned enterprises (SOEs). TSC continued to dominate Taiwan's sugar market in 2004, controlling 65% of the market. However, its market share is expected to shrink in 2005 following the recent lifting of sugar import restrictions and the full liberalization of the domestic sugar market. In response to this challenge, TSC has shifted its focus toward sugar refining and away from sugar production, with the aim of reducing its high cost burden and improving its capacity utilization. The company's sugar business suffered a loss of about NT$1.4 billion in 2004, mainly because of its high personnel costs and the subsidies it had to pay to domestic sugarcane farmers. Taiwan Ratings expects TSC's sugar business to continue to post losses, but these are likely to moderate as a result of its ongoing cost-reduction efforts. Moreover, management has adopted a private sector business model that should gradually help improve operating efficiency. TSC is one of the largest landowners in Taiwan, controlling about 54,160 hectares of land. It has consistently enjoyed good profits on land disposals and development, due in large part to government purchases of land from TSC for industrial development. The company's gains on land disposals totaled NT$7 billion in 2004, up from NT$4.5 billion in 2003. TSC's credit quality is also enhanced by its status as an SOE. The company is 96.6% owned by the Taiwan government and is supervised by the Ministry of Economic Affairs' Commission of National Corporations, which closely monitors the operations of all SOEs in Taiwan. Moreover, the government has a track record of supporting financially troubled SOEs. As no privatization schedule has been set for TSC, government ownership will continue to be factored into the ratings on the company over the medium term. TSC reported net income of NT$5.8 billion in 2004, largely boosted by gains on land disposals. Nevertheless, it reported an operating loss of NT$599 million in 2004, which can be attributed to its loss-making sugar business, but it marked a significant improvement on the NT$2.6 billion loss in the previous year as a result of better operating efficiency. Liquidity. OUTLOOK: STABLE
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