Investing.com -- Fitch Ratings has downgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Taiwan-based Nanya Technology Corporation to ’BB+’ from ’BBB-’ and its National Long-Term Rating to ’A-(twn)’ from ’A(twn)’. The Short-Term Foreign- and Local-Currency IDRs have also been downgraded to ’B’ from ’F3’ and National Short-Term Rating ’F2(twn)’ from ’F1(twn)’. The outlook remains stable.
The downgrade is attributed to a weaker operating performance and increased uncertainties around US tariff policies that could affect global consumer electronics demand. This could potentially slow down the recovery rate of profitability and cash generation. The Standalone Credit Profile (SCP) of Nanya has also been revised to ’bb-’ from ’bb’.
The downgrade is further influenced by a revised assessment of Formosa Plastic Group (FPG) group’s credit profile, which has been negatively affected by higher leverage due to an extended industry downcycle and considerable capex and investments in recent years.
Fitch’s rating approach to Nanya is based on expectations of support from its stronger parent, FPG, according to the Parent and Subsidiary Linkage (PSL) Rating Criteria. Fitch considers FPG’s four largest subsidiaries, which collectively own 62% of Nanya, as the parent.
Nanya’s SCP reflects its smaller scale and weaker market position in the global DRAM industry. The company’s technology lags behind the top-three vendors, but it is expected to close the DRAM market gap with the successful development of in-house technologies since 2017.
The direct impact of US tariff hikes on Nanya remains minimal, but the indirect effects could be significant. Nanya’s product portfolio being heavily concentrated on consumer and commodity DRAM means that the company may find it challenging to achieve its bit shipment growth target of over 30% in 2025.
Fitch expects EBITDA to remain depressed until the contribution from 10nm-class process technology takes off. It is not expected for EBIT to turn around before 1H26; sales tend to lag production by at least one to two quarters, together with greater depreciation and amortisation and higher R&D expenses associated with technology transition.
Fitch forecasts ongoing negative FCF in the next few years, with a slower recovery in profitability and higher capex for its new fabrication facility, Fab 5, where the investment plan is in several phases. About half of the 2025 capex budget is to fund the Fab 5 construction, which is scheduled to be completed by mid-2026.
Nanya is likely to keep prioritising profitability and FCF. Total capex in 2025-2028 is expected to range from TWD70 billion to TWD110 billion, depending on market conditions and the timing of the second phase capex for Fab 5A.
The consumer DRAM market is migrating from DDR3 to DDR4 as DDR3 nears its lifecycle end at major suppliers. The top-three vendors are migrating DDR4 capacity into high-bandwidth memory HBM and DDR5, tightening DDR4 and LPDDR4 supply, which should lead to a better pricing environment for Nanya’s products.
Nanya is also launching its 10nm-class process technology. The product upgrade is expected to drive robust revenue growth and stronger margin recovery in 2026-2027, with the EBITDA margin rebounding to around 32%-36%, from 15% in 2024.
Nanya’s SCP is four notches lower than the credit profile of larger DRAM peers such as SK hynix (KS: 000660 ) and Micron (NASDAQ: MU ), given its smaller scale, and weaker market share and technological capability in the DRAM industry. Nanya also faces higher capex and technology risk than SK hynix and Micron as it plans to upgrade its technology and build a new fab, increasing its financial risk. Nanya’s profitability is weaker than peers due to lower economies of scale.
Factors that could lead to negative rating action or downgrade include a weakening in FPG’s incentives to support Nanya or a prolonged industry downturn and/or high capex in the industry, leading to EBITDA leverage sustained above 4.0x. An upgrade is unlikely unless the combined credit profile of the big-four entities improves.
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