Moody's: WCC's weakened 2014 results to have no impact on ratings

Moody's: WCC's weakened 2014 results to have no impact on ratings
Published: 20 March 2015


Moody's Investors Service says that West China Cement Ltd's (WCC) weakened 2014 results are in line with the rating agency's expectations and will have no immediate impact on the company's B1 corporate family and senior unsecured ratings, or its stable rating outlook.

"WCC's weakened profitability resulted in an increase in its financial leverage in 2014. However, we expect its financial leverage to slightly improve over the next 12-18 months owing to lower capital expenditure, says Jiming Zou, a Moody's Assistant Vice President and Analyst.

This deterioration was mainly driven by lower average selling prices and a small decrease in volumes sold in Shaanxi, the company's major operational base, due to the slowdown in the property market and intensified competition.

WCC revenues decreased by 6.8 per cent YoY in 2014, compared to the 18.3 per cent growth recorded in 2013. The fall in revenues was mainly due to a fall in average selling prices from CNY228/t (US$36.7) in 2013 to CNY220/t in 2014, as well as a 3.4 per cent decrease in cement and clinker sales volume. The slowdown in property investment in Central Shaanxi, coupled with oversupply, resulted in a competitive pricing environment and an overall margin contraction. As a result, despite the benefits of lower coal prices and electricity costs, WCC's EBITDA margin dropped to 25.7 per cent in 2014 from 28.6 per cent a year ago.

However, WCC's more resilient operations in southern Shaanxi generated higher ASPs than the group average, due to its strong market position and consistent demand from government construction projects. Moody's expects WCC's production volume and revenue to slightly recover in 2015 based on an expected contribution from its newly commissioned plants in Xinjiang Yili and Guiyang Huaxi. The two plants will contribute an additional capacity of 1.5Mt and 1.8Mt respectively, resulting in a total capacity increase to 27Mt by the first quarter of 2015.

WCC's margins will remain weak as weak property sector and slow economic growth continue to constrain cement demand and prices. In addition, the two new plants' profitability will remain low during their ramp-up periods.

WCC weakened earnings resulted in an increase in adjusted debt/EBITDA to about 4.0x in 2014 from 3.4x in 2013. This leverage level positions the company at the weak end of the B1 rating category.
However, Moody's expects WCC's financial leverage to slightly improve over the next 12-18 months, as lower capital expenditure will help it generate free cash flow and reduce debt.

After more than doubling its capacity over the last four years, WCC currently has no further plans for capacity expansion. WCC's capital commitments amounted to only CNY180.5m at end-2014, versus CNY585.8m recorded a year ago.