Fitch Ratings downgrades West China Cement

Fitch Ratings downgrades West China Cement
23 March 2012

Fitch Ratings has downgraded West China Cement's (WCC) Long-Term Foreign Currency Issuer Default Rating (IDR) and Senior Unsecured debt rating to 'BB-' from 'BB'. The Outlook on the IDR is Stable.

The rating action is driven by Fitch's view that the deterioration in WCC's gross profits and the increase in its financial leverage in H211 will persist through 2012.

WCC's gross profit dropped to CNY76/t n in 2011 from CNY120/t in 2010, due to the weak average selling prices (ASP) in WCC's core markets, mainly a result of an ongoing price war in Shaanxi province and a lower utilisation rate. Therefore, the company's EBITDA margin fell to 36.4% in 2011 from 46.3% in 2010. Fitch expects that ASPs will not recover to 2010 levels in 2012 and WCC's 2012 EBITDA margin will be in line with 2011's margin.

WCC continues to expand aggressively during the downturn, in light of ample acquisition opportunities and the need to reduce competition. This has resulted in net debt increasing to CNY2746m at end 2011 from CNY821m a year earlier. On 15 March 2012, WCC announced the acquisition of 55% of ShiFeng Cement for CNY401.5m, suggesting that the debt-funded expansion will likely continue this year. The company announced that capacity will rise to 21.7Mt in mid-2012 compared to 12.5Mt at end 2010. It targets to reach a capacity of 25-30Mt by 2015. Therefore, Fitch expects WCC's adjusted net debt / EBITDAR to remain well above 2.0x in 2012.

Fitch also notes that the price depression in Shaanxi does not reflect 2011 nationwide trends, which have demonstrated stable average selling prices (ASPs) due to better competitive dynamics. This suggests that a return to better market discipline in Shaanxi may rapidly improve WCC's margins. These factors underlie the Stable Outlook.

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