August 22, 2017 / 8:31 AM / 10 months ago

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:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on 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. 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