Fitch Ratings has published Anhui Conch Cement Company Limited's (Conch) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating of 'A-'. The Outlook on the IDR is Stable.
The rating's agency notes that Conch is one of the largest cement producers in China. Its principle business includes the manufacturing and selling of cement, clinker and aggregate products. Its credit assessment is driven by its geographically diversified operations, low-cost advantages, strong financial profile and improving market dynamics. These factors, in Fitch's opinion, put Conch in a better position to cope with the current industry down-cycle.
Key ratings drivers
Low-cost industry leader
Conch consistently reports higher gross profit per tonne than its peers. Its cost advantages are driven by economies of scale; strategic site locations with direct access to cheap water transport and limestone resources, and vertically integrated operations; 100 per cent self-sufficiency in limestone resources, as well as self-owned and operated ports for transportation and distribution.
Diversified national presence
Unlike many major listed cement producers in China which generate a dominant portion of their revenue from one region, Conch has a diversified nationwide presence, with 32, 27, 20 and 18 per cent of its 2014 revenue generated from China's east, central, west and south regions, respectively. Each region has a very different market and growth dynamic, given the regional nature of the cement industry. Therefore, we feel that Conch's nationwide presence mitigates its significant exposure to China.
Market dynamics to improve
Fitch expects cement demand growth to remain in the low single digits in the next few years, while we do see a better supply discipline - driven by tighter control on new capacity additions, obsolete capacity shutdowns, lower return on investment, and more stringent environmental standards. As a result, Fitch expects improving utilisation rates for cement plants. It also expects market concentration to increase, resulting in improving margins in the long term.
Very strong financial metrics
Conch exhibits a relatively stable and strong financial profile despite the cyclical nature of the business, with a relatively wide earnings margin, combined with low leverage, healthy liquidity and strong debt-service coverage. Conch has maintained strong coverage levels relative to its peers through the cycle over the last 10 years. Conch also began generating FCF in 2012, due to better working-capital management and a slowdown in capex. Fitch expects the company to continue to generate FCF.