Fitch Ratings believes West China Cement Ltd's weaker operations – as reflected in the 2015 results – is outweighed by its pending takeover by Anhui Conch Cement Company Limited (Conch, A-/Stable).
Fitch's Rating Watch Positive on WCC is driven by the potential further integration between Conch and WCC, which will be resolved once the transaction is completed. WCC's performance in 2015 was a reflection of the weak cement market throughout the year. Its EBITDA margin narrowed to 26.6 per cent in 2015 from 27.8 per cent in 2014, caused by a lower average selling price (ASP) and production volume, which have declined by nine and three per cent to CNY200/t and 17Mt, respectively. The ASP of Shaanxi province-wide cement declined by eight per cent, and production volume was down by four per cent. WCC's market share in Shaanxi has remained unchanged.
Fitch expects WCC's ASP and volume to remain flat in 2016 due to the market weakness, but for the EBITDA margin to improve slightly due to cost-synergies deriving from the integration with Conch. The rating's agency estimates that WCC's FFO net leverage increased to 4.2x in 2015 from 3.5x in 2014 - caused by lower profitability, high capex and longer cash cycle. WCC spent CNY767m in acquiring Yaowangshan Cement (a cement plant in Shaanxi) in November 2015. In addition, the company's cash cycle has extended from -6 days to 18 days, due to longer inventory and receivable days, which increased working-capital requirements.
WCC's credit profile in 2016 will be driven more by its pending acquisition by Conch, Fitch writes. Conch acquired 16.67 per cent of WCC for HKD1.5bn (CNY 1.2bn) in June 2015, and became WCC's second-largest shareholder. After that, Conch increased its shareholding to 21.2 per cent, and has placed two non-executive directors on WCC's board. Conch announced in December 2015 that it would increase its ownership to 51.6 per cent by injecting four of its plants in Shaanxi into WCC. Once the acquisition is complete, Conch will have to make a mandatory unconditional cash offer for the remaining WCC shares. The acquisition was approved by the shareholders in January 2016, but still pending regulatory approval.
Once Conch injects its four plants in Shaanxi into WCC, WCC's market share will improve to 40-50 per cent, well above the second-place operator Jidong Cement, which had a 23 per cent market share in 2015. "This will significantly improve WCC's pricing power even in a depressed demand environment.," Fitch notes. It believes the stronger business profile compensates for the structurally weaker demand for cement in the long term.