Reuters logo
Fitch Upgrades West China Cement to 'BB-', Outlook Stable
August 22, 2017 / 8:28 AM / in 4 months

Fitch Upgrades West China Cement to 'BB-', Outlook Stable

(The following statement was released by the rating agency) SHANGHAI/HONG KONG/SINGAPORE, August 22 (Fitch) Fitch Ratings has upgraded West China Cement Limited's (WCC) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'B+'. The Outlook on the IDR is Stable. A full list of rating actions is at the end of this release. The upgrade is driven by significant improvement in WCC's financial profile, as evident in a substantial decrease in net leverage and return to positive free cash flow (FCF) generation. Net leverage dropped to 2.1x in 2016 from 3.6x in 2015, and we expect this to further drop to 1.8x in 2017 and 1.5x in 2018, well below our positive trigger of 3.5x. The Stable Outlook reflects Fitch's expectation that WCC's leverage will remain low over the rating horizon. KEY RATING DRIVERS Improving Profitability: WCC's gross profit per ton of its cement products increased to CNY53 per ton (t) in 1H17, up from CNY38/t in 2016. The increased profitability was due largely to a rise in the average selling price (ASP) in WCC's core market of southern and central Shaanxi where prices increased by 12.5% yoy to CNY242/t and 42.5% yoy to CNY232/t, respectively. WCC's EBITDA margin widened to 38.2% in 1H17 from 35.4% in 2016 as result of the higher profitability. Fitch expects WCC to maintain current levels of profitability throughout 2017, however we expect gross profit per ton to contract slightly from 2018 - reflecting slowing domestic economic growth and fixed-asset investment (FAI) investment. Despite this, WCC's core western markets should be relatively resilient due to China's focus on developing the western areas, and FAI growth in western China has generally outpaced the rest of the country. Limited Capex, Lower Leverage: Fitch expects WCC's capex spending will be limited in the near term due to a halt in capacity expansion. WCC's cement utilisation rate was around 61% at end-2016, which provides plenty of headroom to ramp up production before additional capacity is needed. The lower capex is likely to boost FCF generation and decrease net debt. We expect capex of CNY300 million each year between 2017 and 2019. WCC's FFO-adjusted net leverage decreased to 2.1x in 2016 from 3.6x in 2015, as a result of resilient profitability and lower capex. Fitch expects this trend to continue in the next 12-24 months, and net leverage should decrease to 1.8x in 2017 and 1.5x in 2018. Expansion into Aggregate Production: WCC is in the process of constructing an aggregate production facility with annual production capacity of around 16 million tons. Aggregates are high-margin products, and we expect WCC to sell around 8 million tons in 2018 when production commences. At current prices, Fitch expects WCC's new aggregate business to add about CNY640 million in sales and CNY320 million in gross profit in 2018. Conch Shareholding Beneficial: Fitch expects continued collaboration between WCC and Anhui Conch Cement Company Limited (Conch, A-/Stable) might help WCC further improve its operating efficiency and strengthen its market position in Shaanxi. Conch's involvement with WCC has helped the company to reduce raw material prices and boost profitability, as well as collaborating on creating more stable market supply and higher pricing discipline in Shaanxi and nearby regions. Conch is WCC's second-largest shareholder, with a 21.16% stake, and also has two non-executive directors on WCC's eight-member board. DERIVATION SUMMARY WCC is smaller in scale than China Oriental Group Company Limited (COG, BB-/Positive), but maintains significantly wider margins due to the nature of the cement industry versus steel. Both COG and WCC dominate their home markets in their core businesses, which allows them to defend profitability during industry down-cycles. Both are likely to maintain less than 2.0x net leverage in 2017 and 2018, while COG exhibits a greater level of financial flexibility as it was able to deleverage while the market was still down through liquidating working capital. WCC, by contrast, was only able to deleverage when market fundamentals improved and profitability increased. KEY ASSUMPTIONS - Capex of CNY300 million each year in 2017, 2018 and 2019. - Fitch has taken a conservative approach when forecasting WCC's cash flows; we expect the company to either increase dividend payments or boost M&A activity in the near term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Significant increase in operating scale and geographic diversification - Sustained net cash position Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO net leverage above 3.5x on a sustained basis - Failure to generate positive FCF on a sustained basis - Significant increase in shareholder friendly activities such as share repurchases and dividends. LIQUIDITY Adequate Liquidity: WCC had about CNY1.5 billion in cash against CNY973 million in short-term loans at end-1H17. WCC also maintains close to CNY1 billion of unused banking facilities. FULL LIST OF RATING ACTIONS West China Cement Limited - Upgraded Long-Term Foreign-Currency IDR to 'BB-'from 'B+' - Upgraded senior unsecured rating to 'BB-' from 'B+' - Upgraded USD400 million 6.5% senior notes due 2019 to 'BB-' from 'B+' Contact: Primary Analyst Laura Zhai Director +852 2263 9974 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below