Moody's: West China Cement's ratings unaffected by Yaowangshan acquisition

Moody's: West China Cement's ratings unaffected by Yaowangshan acquisition
Published: 04 November 2015

Moody's Investors Service says that West China Cement Ltd's (WCC) acquisition of Tongchuan Yaowangshan Ecological Cement Co Ltd (unrated) will not affect WCC's Ba3 corporate family or senior unsecured ratings.

Ratings outlook stable
On 1 November 2015, Yaobai Special Cement Co., Ltd. (unrated) – WCC's indirectly owned subsidiary – entered into an agreement with China Jiantou Trust Co, Ltd (unrated) to acquire a 100 per cent equity stake in Yaowangshan Cement for CNY392m, and take over CNY376m in shareholder loans.

"WCC's acquisition of a regional competitor with a total cement capacity of 2.2Mta will enhance its market share and generate potential synergies with its existing plants, which will in turn improve its competitiveness and help it better weather the weak market environment," says Jiming Zou, a Moody's Vice President and Senior Analyst, and also the Local Market Analyst for WCC.

The acquisition will result in WCC increasing its total cement production capacity by about 10 per cent to 23.3Mta in Shaanxi Province. It will also increase WCC's market share in the province to about 29 per cent from its current 26 per cent.

Moody's notes that the acquisition is in line with the company's strategy to consolidate the province's market for cement, and underscores the benefits of its cooperation with Anhui Conch Cement Co Ltd (A3 stable). Anhui Conch injected CNY1.2bn into WCC in June 2015 for a 16.7 per cent equity stake in the company.

Moody's says that the acquisition of Yaowangshan Cement will not negatively impact WCC's gross debt/EBITDA, which was at 4.3x for the 12 months to 31 June 2015. The acquisition will be mainly funded with WCC's substantial cash balance, which amounted to CNY1.9bn at end-June 2015, after Anhui Conch's equity subscription.

Limited contribution
The rating's agency says Yaowangshan Cement's EBITDA contribution to WCC will be limited, because the acquired company only started production in 2014, and recorded a loss of RMB56 million in the same year.

Moody's expects that the consolidation in the industry will continue over the next 1-2 years, given the challenging operating environment for cement companies in Shaanxi Province. This situation should benefit producers like WCC over time, given Moody's expectation of an easing in competition. So far this year, cement prices have fallen to historic lows in Shaanxi Province, due to lackluster levels of real estate and infrastructure spending.

Liquidity
In terms of liquidity, Moody's expects that WCC will face little difficulty in rolling over its CNY850m in maturing bank loans, and in refinancing its CNY800m domestic medium term notes due in March 2016, because of its cooperation with Anhui Conch as well as WCC's modest debt leverage.