Moody's says WCC's profit warning is credit negative

Moody's Investors Service says West China Cement Ltd's (WCC) profit warning for 2014 is credit negative.

On 29 October 2014, WCC announced that its consolidated net profit for 2014 will fall substantially from 2013, based on preliminary results for the first nine months ended 30 September 2014.

"Moody's expects WCC to demonstrate a lower EBITDA margin which will in turn increase its debt/EBITDA ratio, and will therefore continue to position the company weakly within the B1 rating level," says Franco Leung, a Moody's Vice President and Senior Analyst and the International Lead Analyst for the company.

Moody's believes that the weak profitability is likely due to: (1) declining average selling prices (ASPs) for cement products, given the continued price competition in central Shaanxi Province; (2) the one-time financial costs incurred from the early redemption of WCC's senior notes due January 2016; and (3) a small non-cash forex loss on the senior notes as compared with a large forex gain in 2013.

Cement prices in Shaanxi declined substantially in 3Q2014 against the backdrop of intensified price competitions in the province's central region.

The company's average cement price fell to around CNY200/t in 3Q2014 from CNY239 in 1H 2014. Moody's does not expect prices in 4Q2014 to recover to the levels seen in 1H 2014 due to the continued price competition in central Shaanxi.

Nonetheless, major raw material prices have fallen significantly in 2014. Moody's estimates that WCC's adjusted EBITDA margins declined to around 25%-28% from the 28.6% recorded in 2013. This development will in turn increase its debt/EBITDA ratio close to 4x which is at the high end for its B1 rating level.

In light of the challenging market conditions, Moody's expects the company to conserve cash by reducing its capital expenditures to CNY200m in 2015 from about CNY500m in 2014.

The effects of this scenario will be a slowdown in capacity expansion after the completion of Xinjiang Yili and Guiyang Huaxi plants.

At the same time, WCC has improved its debt maturity profile by refinancing its outstanding US$400 million notes due 2016 through a new bond issuance in September 2014.

Moody's will monitor the company's cash balance to ensure that it has the liquidity to operate through the competitive environment.

This publication does not announce a credit rating action.