Fitch revises West China Cement's Outlook to Stable, affirms 'BB-' Ratings

Fitch revises West China Cement's Outlook to Stable, affirms 'BB-' Ratings
Published: 25 June 2015


Fitch Ratings has revised West China Cement Limited's (WCC) Outlook from Negative to Stable. Its Long-Term Issuer Default Rating (IDR), senior unsecured and bonds ratings have been affirmed at BB-. The change in Outlook reflects WCC's strengthened position in its core Shaanxi market and its improved leverage, following the recent equity placement to Anhui Conch Cement Company Ltd (Conch).

Key rating's drivers

Conch ties strengthen market leadership
Collaborating with conch will strengthen WCC's market position in Shaanxi in Fitch's view. Last week, WCC announced it placed 903 million new shares to Conch for HK$1.5b (CNY1.2bbn). After the transaction, Zhang Jimin's (Chairman) ownership will be diluted to 32.4 per cent from 38.9 per cent, with Conch becoming its second largest shareholder, and owning 16.67 per cent. Although WCC is the largest player in Shaanxi, it has a smaller scale compared to Conch which has greater geographical diversification, Fitch adds.

Improving market dynamics
The partnership between Conch and WCC can bring about a more rapid transition to a disciplined supply side in the Shaanxi Cement market, according to the rating's agency. Fitch writes: "Conch has been playing a significant role in initiating price competition in Shaanxi to squeeze out competitors. A combination of Conch's and WCC's Shaanxi cement assets can result in the formulation of a more cohesive strategy to limit cut-throat competition and maintain rational production of cement in the province. The effectiveness of their business strategy is multiplied with their enlarged market share."

Placement strengthened financial profile
Fitch further adds that the recent equity placement to Conch will strengthen the company's cash position and reduce the company's leverage from 3.5x in 2014 to 2.0x in 2015, by its estimate. Acquisition risk remains: aAccording to the company, it will use the proceeds for general working capital and future potential acquisitions and/or other investment opportunities. There's a risk that the company might use up its equity placement proceeds for acquisition rather than deleveraging, Fitch notes.