Fitch Downgrades Shanshui to 'B-'; Outlook Negative

Fitch Ratings has downgraded China Shanshui Cement Group Ltd's (Shanshui) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings to 'B-' from 'B+'. The agency has also removed the company from Rating Watch Negative and assigned it a Negative Outlook. The Recovery Rating on the senior unsecured ratings remains at 'RR4'.

The rating downgrade reflects the continued weak business environment and Shanshui's reliance on short-term financing, which could pressure liquidity. The Negative Outlook reflects the lack of visibility as to when the company will refinance its short-term debt with longer-term facilities.

Key ratings drivers

Poor profitability in 1H15: Shanshui's EBITDA in 1H15 declined 79 per cent to CNY311m from CNY1484m in 1H14, due to weakness in the Chinese cement market and one-off expenses. Fitch believes the employee and shareholder disputes that took place in 1H15 also negatively affected the company's operations and contributed to the low profitability.

Market share remains stable: Shanshui's sales fell by 31 per cent YoY 1H15 due to a 21 per cent drop in cement and clinker volume, and a 12 per cent fall in cement price and 16 per cent decrease in clinker price. This is in line with the sharp decline in cement prices and volumes in Shanshui's core markets in Shandong, Liaoning and Shanxi, which were the worst performing areas of China. Fitch believes the cement market will remain subdued in the rest of 2015, but is not likely to deteriorate from current levels.

Increased liquidity pressure: Shanshui's short-term borrowings increased to CNY11bn at end-1H15 from CNY4bn at end-2014 as a result of redemption of its USD378m (principal and interest) 2016 note and the poor operating environment. In comparison, Shanshui had cash and equivalents of CNY4bn at end-1H15. Short-term commercial paper (SCP) and medium-term notes (MTN) accounted for 51 per cent of the company's short-term borrowings and 41 per cent total borrowings. We believe the company had to rely on instruments with shorter maturities for funding because its access to bank financing remained curtailed by the unresolved shareholder disputes. The company says it intends to lengthen its debt maturity profile in 2H15.

Resolution of disputes is key: Shanshui's employee and shareholder disputes are still unresolved although Asia Cement Corporation (ACC), which owns 20.90 per cent of Shanshui, and China National Building Materials (CNBM), which owns 16.67 per cent, may make an offer to acquire the rest of the company subject to the satisfaction of certain pre-conditions. Fitchs believes the resolution of the disputes will bring the company's operations back to normal, which help it to reduce leverage.