S&P lowers West China Cement corporate rating, China

S&P lowers West China Cement corporate rating, China
Published: 04 September 2012


Standard & Poor's Ratings Services lowered its long-term corporate credit rating on West China Cement Ltd. (WCC) to 'B+' from 'BB-'. The outlook is negative. The research house also lowered the issue rating on the China-based cement manufacturer's senior unsecured notes to 'B+' from 'BB-'.

S&P said in a statement: “We lowered the rating to reflect our view of WCC's weakened liquidity position, given the company's low cash balance and high short-term debt. WCC's cash balance fell to CNY173m as of June 30, 2012, from CNY560m as of 31 December 2011. The decline was mainly due to higher-than-expected cash payments for finalising the acquisition of Shifeng Cement and for existing capital expansion. WCC has about CNY1.25bn in short-term debt due within the next 12 months that it needs to continually roll over.

“We believe that WCC has solid relationships with onshore local banks. The company's track record demonstrates its ability to roll over its short-term working capital loans. Nonetheless, WCC's current liquidity position may require it to cut back its capital expenditure in the second half of 2012 to preserve cash. The company's absence of financial flexibility is no longer consistent with a 'BB-' rating.”

In S&P’s view, cement prices in Shaanxi province may have hit bottom. WCC's gross margins have been improving since April this year. “While we believe that the Shaanxi market is still in the early stages of recovery from a price war, recovery could be bumpy and uneven,” S&P noted. The house does not expect the company's profit margin to improve materially on a sustainable basis over the next 12 months. It also do not expect its gross margins to return to more than 40%, the level in 2010 and the first half of 2011. “Oversupply, uncertain demand, and intense competition remain challenges in the Shaanxi cement market,” S&P warned.

Over the past year, WCC's market position has improved. The company's acquisitions of Shifeng and Fuping Cement strengthen its market position in eastern Shaanxi. In addition, lower cement prices in Shaanxi have allowed WCC to gain market share in rural areas from inefficient producers. WCC's good market position has also enabled it to maintain some pricing premium in southern Shaanxi, although higher coal transportation costs somewhat lowered margins. WCC is eligible for certain local government rebates by producing low-grade cement using recycled industrial waste.

In S&P’s our base case, it expects WCC's average selling price to be about CNY250/t in 2012. It has cement sales estimates for the company for 2012 to 14.8Mt from 15.78Mt. S&P anticipates that WCC's financial leverage, as measured by a ratio of total debt to EBITDA, will increase to about 4.1x at the end of 2012.