Standard & Poor’s Ratings Services (S&P) assigned its ’BB’ long-term corporate credit rating and ’cnBBB-’ Greater China credit scale rating to China Shanshui Cement Group (Shanshui), a China-based cement producer. The outlook is stable. At the same time, Standard & Poor’s assigned its ’BB-’ issue rating and ’cnBB+’ Greater China credit scale rating to the company’s proposed issue of senior unsecured notes due 2016. The rating on the notes is subject to our review of the final documentation for the notes issuance.
"The rating on Shanshui reflects our opinion of the company’s aggressive growth strategy and its sensitivity to volatile product prices and input costs," said Standard & Poor’s credit analyst May Zhong. "The company is also exposed to the competitive, cyclical, and high capital- and energy-intensive nature of the industry in which it operates. Shanshui’s strong market position, reasonable geographic diversity, and relatively efficient operations partly offset these weaknesses."
Despite China’s favorable demographics and long-term growth potential for demand, S&P view the cement industry as having higher-than-average risks. This reflects the high degree of competition, companies’ susceptibility to increases in input costs and volatile product prices, and cyclicality.
Shanshui’s competitive advantage is underpinned by its strong market position in its core markets, notes S&P. The company is the second largest cement producer in China with 30.9Mt of clinker and 66.5Mt of cement nameplate capacity at the end of 2010. In 2010, sales revenue reached RMB11.8bn. It has a particularly strong position in Shandong province, where it is a leading player with about 40% market share (based on nameplate capacity).
Compared with its domestic peers, Shanshui also benefits from good and rapidly expanding geographic diversification. Its current operations spread across three provinces and two autonomous zones in China: Shandong, Liaoning, Inner Mongolia, Shanxi and Xinjiang. All of Shanshui’s production lines are using New Suspension Pre-Heater Technology (NSP).
Shanshui’s customer base is well diversified, with its top 10 customers accounting for less than 10% of revenue. About 43% of Shanshui’s cement sales are exposed to government infrastructure projects, 39% to real estate, and 17% to rural customers. "The stable outlook reflects our expectation that Shanshui is likely to strengthen its market position over the next 24 months. We also expect the company to have adequate liquidity and cash flow to cope with capacity expansion and industry competition," said Ms. Zhong. "We expect Shanshui’s ratio of adjusted total debt to EBITDA to increase to about 3.0x-3.5x following the proposed notes issuance; the ratio is likely to gradually decline thereafter with the increase in cash flow from newly commissioned capacities."