Moody's: WCC results in line with expectations

Moody's Investors Service says that West China Cement Ltd's (WCC) first-half results are in line with Moody's expectations. As a result, WCC's B1 corporate family and senior unsecured ratings remain unchanged.

"WCC improved its profitability and financial leverage in 1H 2014, despite a moderation in revenue growth, due to slowing cement demand," says Jiming Zou, a Moody's Assistant Vice President and Analyst.

During 1H 2014, WCC achieved a 1.5 per cent YoY  growth in sales, which was down from the 18.3 per cent growth recorded in 2013. Its 2.6 per cent YoY sales price increase – which was supported by WCC's strong market position in southern Shaanxi – offset a 0.2 per cent contraction in sales volume.

Despite the company's lower revenue growth, its reported EBITDA margin improved to 31.8 per cent in 1H 2014 from 28.9 per cent a year ago, owing to sales price increase, lower coal prices and electricity costs.

Its higher earnings and lower debt levels in 1H 2014, resulted in an adjusted debt/EBITDA of about 3.2x for the 12 months to 30 June 2014 down from 3.4x in 2013. This level of leverage solidly positions the company in the B1 rating category.

"We expect WCC's financial leverage to continue improving over the next 12-18 months, given its ability to generate free cash flow and lower capital expenditure requirements," adds Zou.

Moody's noted that the WCC has entered into a slow growth period, after more than doubling its capacity over the last 3-4 years, as cement demand has slowed. In addition, the government has suspended approvals for new cement plants, and the company management has adopted a more prudent approach towards business expansion, against the backdrop of slowing demand.

WCC's Xinjiang Yili and Guiyang Huaxi cement plants are scheduled to be completed in 2H 2014. The company currently has no other new construction projects. Its committed capital expenditure fell to about CNY322m at end-June 2014 from CNY586m at end-2013.

On the other hand, the company's revenues and earnings will grow modestly, as newly commissioned plants start contributing to its overall performance, Moody's adds. The two new facilities in Xinjiang Yili and Guiyang Huaxi will have production capacities of 1.5Mta and 1.8Mta, respectively, and will increase WCC's production capacity to 27Mta by end-2014.

Given the additional capacity, Moody's expects the company to generate CNY200-300m in free cash flow annually for 2014 and 2015. In 1H 2014, its net debt fell by about CNY100m to CNY3.3bn.