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Rating Action:

Moody's confirms West China Cement's Ba3 corporate family and bond ratings; outlook negative

 The document has been translated in other languages

04 Jul 2016

Hong Kong, July 04, 2016 -- Moody's Investors Service has confirmed West China Cement Limited's (WCC) Ba3 corporate family and senior unsecured ratings.

The ratings outlook is negative.

This concludes the ratings review initiated on 1 December 2015.

On 30 June 2016, WCC and Anhui Conch Cement Company Limited (Conch, A3 stable) jointly announced that the transaction agreement announced on 27 November 2015 had been terminated.

The termination was because of the fact that certain conditions had not been satisfied or waived before the transaction's long stop date of 30 June 2016, including and not limited to the approval by Chinese commerce authorities.

Under the original agreement, WCC was to receive four of Conch's cement-producing companies based in Shaanxi Province in exchange for its issuance of new shares to Conch.

Under this scenario, WCC would have seen Conch become its largest shareholder, with an equity stake of 51.6% from the current 21.2%.

RATINGS RATIONALE

"The rating confirmation reflects WCC's financial performance and Moody's expectation that its operation and access to funding have been strengthened by its association with Conch, even though the latter's equity stake in WCC has not risen because of the transaction's termination," says Gerwin Ho, a Moody's Vice President and Senior Analyst.

WCC's adjusted EBITDA margin is expected to remain stable at 27-28% over the next 12-18 months -- compared with 27.7% in 2015 -- as lower production costs for its products partially offset the effects of downward pricing pressure.

Moody's expects WCC to generate positive free cash flow in 2016, which will help reduce debt, given its reduced capital spending. As a result, we expect debt/EBITDA to decline to 3.7-4.0x over the next 12-18 months from 4.0x in 2015. This level of leverage positions WCC in the Ba-rating level.

On the other hand, Moody's expects WCC's revenues to fall moderately due to weak market fundamentals.

Moody's expects that the consolidation in China's cement manufacturing industry will continue over the next 1-2 years, with surviving producers benefiting from a reduced level of production capacity against the backdrop of difficult market conditions.

In this context, Moody's believes that WCC has the opportunity to become one of the surviving producers over the long term because of Conch's investment.

Thus, Moody's expects WCC to benefit from the achievement of business synergies with Conch, a development which will likely include operating support to reduce costs; better management of supply; reductions in borrowing costs; and improvements in access to the bank and capital markets.

The negative outlook reflects Moody's concerns over WCC's weak liquidity position against the backdrop of weak pricing in the cement manufacturing industry. Reported cash/short-term debt was at a low level, measuring only 39% at end-2015.

Upgrade pressure in the near term is unlikely, given the negative outlook.

However, the ratings outlook could return to stable, if (1) WCC achieves a sound liquidity position, such that its cash balance fully covers its short-term debt; (2) WCC is disciplined in its capital expenditure; (3) WCC does not undertake acquisitions over the next 12 months, given the difficult nature of the market; and (4) Conch does not reduce its investment in WCC.

On the other hand, downward rating pressure could emerge, if WCC's financial and/or liquidity position weakens because of falling revenues; rising costs; aggressive acquisitions; or unexpected shareholder distributions.

Financial indicators of a rating downgrade include EBITDA margins below 20% -25%, or debt/EBITDA exceeding 3.5x - 4.0x on a sustained basis.

Any reduction in WCC of Conch's level of ownership will also be negative for WCC's ratings.

The principal methodology used in these ratings was Building Materials Industry published in September 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

West China Cement Limited (WCC) is one of the leading cement producers by capacity in China's Shaanxi province. At end-2015, the company's annual production of cement was 29.2 million tons. Its revenues totaled RMB3.5 billion in 2015.

Anhui Conch Cement Company Limited -- listed on Hong Kong Stock Exchange since 1997 and the Shanghai Stock Exchange since 2002 -- is the second-largest cement producer in China by production volume. The company had about 229 million tons per annum (mtpa) clinker capacity and 290 mtpa cement capacity in 2015. In FY2015, it recorded RMB51 billion in sales. The Anhui Provincial Government indirectly owned an 18.8% equity stake in the company at end 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Gerwin Ho
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's confirms West China Cement's Ba3 corporate family and bond ratings; outlook negative
No Related Data.
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