Moody's upgrades West China Cement to Ba3; stable outlook

Moody's upgrades West China Cement to Ba3; stable outlook
Published: 25 August 2015

Moody's Investors Service has upgraded West China Cement Limited's (WCC) corporate family and senior unsecured ratings to Ba3 from B1.

"The upgrade reflects the improvement in WCC's financial profile following the investment by Anhui Conch Cement Company Limited (A3 stable) in the company," says Franco Leung, a Moody's Vice President and Senior Analyst.

At the end of June 2015, Conch had completed a subscription to shares equivalent to a 16.67 per cent equity stake in WCC. As a result, WCC's cash balance improved substantially to CNY1.9bn on 30 June 2015 from CNY700m at end-December 2014. In addition, WCC's debt/capitalisation improved to 40 per cent on 30 June 2015 from 45 per cent at end-December 2014.

"WCC's improved financial position is important because market conditions have become more challenging with demand for cement falling because of lower infrastructure investments in Shaanxi Province," says Leung. "The company's 1H 2015 results are indicative of this trend."

During 1H 2015, WCC's revenue dropped 15 per cent YoY to CNY1.7bn and its adjusted EBITDA margin fell to 28.5 per cent from 31.7 per centa year ago. As a result, adjusted debt/EBITDA surged to 4.3x for the 12 months ended June 2015 from 3.7x for 2014.

But net debt/EBITDA of 2.3x for the 12 months ended June 2015 continues to support its Ba3 rating.

Over the next 12 months, Moody's expects Conch will help WCC lower the risk of a deterioration in its financial profile. Moreover, WCC is expected to reduce the operating losses in Xinjiang and Guizhou Province where its new capacities are being ramped up.

"The upgrade also reflects Moody's expectation that WCC's operation and access to funding could further be strengthened by its association with Conch," says Zou Jiming, a Moody's Vice President and Senior Analyst and Local Analyst for Conch.

Furthermore, Moody's expects that the consolidation in China's cement manufacturing industry will continue over the next 1-2 years, and while market conditions will remain difficult, surviving producers will benefit from a reduced level of production capacity. In this context, Moody's believes that the investment by Conch further provides WCC with the opportunity to become one of the surviving producers over the long term.

Therefore, Moody's expects WCC to benefit from the achievement of business synergies with Conch, a development which will likely include operating support to reduce costs; better management of supply; reductions in borrowing costs; and improvements in access to the bank and capital markets.

The rating outlook is stable, reflecting Moody's expectation that WCC (1) will maintain its leading market position in Shaanxi Province; (2) will be disciplined in its capital expenditure; and (3) will not undertake acquisitions over the next 12 months, given the difficult nature of the market.