Hong Kong, September 16, 2019 -- Moody's Investors Service ("Moody's") has upgraded the corporate family
rating (CFR) of West China Cement Limited (WCC) to Ba2 from Ba3.
The outlook on the rating is stable.
RATINGS RATIONALE
"The upgrade reflects the sustained improvement in WCC's capital
structure, which increases its financial buffer against business
volatility," says Roy Zhang, a Moody's Associate Vice
President and Analyst.
WCC's leverage — as measured by total debt to EBITDA —
fell to 0.9x for the 12 months to 30 June 2019, a level which
is significantly lower than the 3.0x-4.0x seen between
2012 and 2016. The company's total reported debt fell to
RMB2.8 billion at 30 June 2019 when compared to the peak of RMB4.0
billion at the end of 2016. And, its reported net debt fell
to RMB1.7 billion at 30 June 2019 versus the peak of RMB3.5
billion at the end of 2014.
Moody's believes WCC's ability to retain capital has structurally
improved due to reduced capex needs, because new capacity additions
will not be approved by the regulators. Meanwhile, industry
competition is easing, owing to supply side reforms and China's
focus on environmental concerns.
Moody's believes WCC has a large financial buffer to sustain its
financial leverage against its rating level throughout the business cycle.
WCC also had about RMB832 million in short-term loan receivables
and RMB999 million in long-term loan receivables on its balance
sheet at 30 June 2019. These assets can be used to further improve
its capital structure, if needed.
WCC repaid its USD bond on 11 September 2019. Moody's expects
that the company's cash on hand will be sufficient to cover the
remaining short-term debt. In addition, Moody's
also expects that the company will generate strong operating cash flow
over the next 12-18 months.
The improved liquidity allows WCC to navigate through market volatility,
even if funding access is temporarily unavailable, due to weak market
conditions.
WCC's Ba2 corporate family rating considers the company's dominant market
share in cement production in southern Shaanxi Province, with a
long track record of operations, and its business synergies with
Anhui Conch Cement Company Limited (Conch, A2 stable). Conch
held a 21.1% stake in WCC at 31 December 2018.
However, the rating is constrained by WCC's small scale, concentrated
product and market exposure, and inherited industry cyclicality.
The stable rating outlook reflects Moody's expectation that WCC will generate
health cash flow and maintain prudent financial management and adequate
liquidity.
The rating also takes into account the following environmental,
social and governance considerations.
First, the building materials sector shows elevated credit exposure
to environmental risks, in terms of air pollution and carbon emission.
Moody's points out that WCC has a good track record of compliance
with local regulations. Its operations have experienced limited
impact from the tightened environmental standards in China. Moreover,
it has benefited from industry consolidation, because the higher
standards have squeezed out smaller producers.
Second, on the governance front, its ownership is concentrated
in its key shareholder, Mr. Zhang Jimin, who held a
total 32.3% stake in the company at the end of 2018.
This risk is partially mitigated by the higher board oversight exercised
through its strategic minority shareholder, Conch.
Moody's could upgrade WCC's rating if the company can demonstrate:
(1) increased scale and greater geographic diversification; and (2)
continued improvement in its capital structure, such that debt/EBITDA
stays below 1.5x, and with a net cash position on a sustained
basis.
On the other hand, downward rating pressure could emerge,
if WCC's financial or liquidity position, or both, weaken
because of falling revenue, rising costs, aggressive acquisitions
or unexpected shareholder distributions.
Financial indicators of a rating downgrade include an EBITDA margin below
25%, or debt/EBITDA exceeding 3.0x, or adjusted
debt/capitalization exceeding 40% on a sustained basis.
Any reduction in Conch's support for or level of ownership in WCC would
be negative for WCC's rating.
The principal methodology used in this rating was Building Materials published
in May 2019. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
West China Cement Limited is one of the leading cement producers by capacity
in Shaanxi Province. At 30 June 2019, the company's annual
cement production capacity measured 29.2 million tons. Its
revenues totaled RMB3.3 billion in 1H 2019.
At 31 December 2018, the company was 32.3%-owned
by its founder and chairman, Mr. Zhang Jimin, and 21.1%
by Anhui Conch Cement Company Limited.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
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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
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
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to rated entity, Disclosure from rated entity.
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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.
Roy Zhang
Asst Vice President - 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
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
