West China Cement Limited — Moody’s revises West China Cement’s outlook to stable, affirms Ba2 corporate family rating

Rating Action: Moody’s revises West China Cement’s outlook to stable, affirms Ba2 corporate family ratingGlobal Credit Research – 12 Jan 2022Hong Kong, January 12, 2022 — Moody’s Investors Service has affirmed West China Cement Limited’s (WCC) Ba2 corporate family rating (CFR) and senior unsecured rating.At the same time, Moody’s has revised the rating outlook to stable from positive.”The outlook change to stable reflects our expectation that WCC’s expansion strategy in Africa will elevate its leverage over the next 12-18 months beyond our earlier forecast, amid business volatility during its execution,” says Roy Zhang, a Moody’s Vice President and Senior Analyst .”The risks are balanced by the company’s healthy cash flow generation from the domestic market and adequate liquidity. WCC will likely maintain its strong liquidity and moderate leverage, as measured by debt to EBITDA, below 3x over the next 12-18 months. This leverage level is in line with its rating category, and hence the rating affirmation at Ba2,” adds Zhang.RATINGS RATIONALEWCC’s Ba2 CFR reflects the company’s dominant market share in cement production in central and southern Shaanxi Province.The rating also considers WCC’s business synergies with Anhui Conch Cement Company Limited (Anhui Conch, A2 stable). Anhui Conch has increased its shareholding in WCC to 27.1% as of the end of 2021, from 21.1% as of the end of 2020.At the same time, WCC’s rating is constrained by the cyclical nature of the cement industry, the execution risks in its expansion, its developing operating scale, and limited diversification in terms of product and market coverage.These risks are partially tempered by favorable industry conditions in WCC’s markets, where cement supply is constrained due to regulatory and environmental factors. Such restrictions help balance the supply and demand for cement, supporting high cement prices.WCC’s expansion strategy in the African market, if executed successfully, will improve the company’s business profile, in terms of operating scale and market diversification. However, the strategy requires significant investment and carries execution risks.Moody’s expects WCC to prudently manage its balance sheet by funding the project with a pre-funded USD bond issuance and internal cash flow, such that the expansion will not have a material impact on the company’s leverage and liquidity.Nevertheless, given the high business volatility facing its African projects and moderating domestic demand, Moody’s expects company’s leverage will likely not stay below 2.0x over the next 12-18 months, resulting in the rating agency’s decision to revise the outlook to stable.WCC’s liquidity is good. The company had cash and cash-like sources of about RMB1.9 billion as of the end June 2021. This, together with its strong operating cash flow and USD bond issuance, is sufficient to cover its debt maturities and planned capital expenditure over the next 12-18 months.The senior unsecured bond rating on the proposed USD notes is unaffected by structural subordination due to claims at the operating company level. This is because, despite its status as a holding company with a majority of claims at the operating subsidiaries, WCC’s creditors benefit from the group’s highly diversified business profile, with cash flow generation across a large number of operating subsidiaries in different parts of China and overseas, and which mitigates structural subordination risk.WCC’s CFR also considers the following environmental, social and governance (ESG) risks.Globally, the building materials sector has elevated credit exposure to environmental risks, which could be significant for WCC’s credit quality in the next three to five years. China’s cement sector is a major contributor to the country’s carbon emissions and a major emitter of sulfur dioxide, nitrogen oxides and dust. The mining and manufacturing processes for cement production is energy intensive, given their large consumption of coal, electricity and water.WCC has upgraded its production lines to meet higher emission standards, and has implemented measures to increase energy efficiency and reduce dust and carbon emissions. As the local industry leader, WCC continues to invest in equipment and processes to manage the environmental risks. The company will benefit from tightened environmental standards in China as the cement industry consolidates.In terms of corporate governance, the company was 32.3% owned by its founder and chairman, Zhang Jimin, as of the end of 2021. This concentrated shareholding risk is partially tempered by WCC’s listing status and the fact that Anhui Conch, which held a 27.1% stake in the company as of the end of 2021, has two seats on its board.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable rating outlook reflects Moody’s expectation that WCC will continue to generate healthy cash flow and maintain prudent financial management and adequate liquidity.Moody’s could upgrade WCC’s rating if the company increases its scale and geographic diversification; and maintains a sound capital structure, such that its debt/EBITDA stays below 2.0x, and adequate liquidity to cover its refinancing, expansion and shareholder distribution.On the other hand, downward rating pressure could emerge if WCC’s financial and/or liquidity position weaken because of falling revenue, rising costs, aggressive acquisitions or unexpected shareholder distributions.Financial indicators of a rating downgrade include debt/EBITDA exceeding 3.0x-3.5x or adjusted debt/capitalization exceeding 50% on a sustained basis.The principal methodology used in these ratings was Building Materials published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287900. Alternatively, please see the Rating 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. As of the end 2020, the company’s annual capacity was 33.2 million tons. Most of WCC’s plants are located in central and southern Shaanxi Province. As of the end of 2020, the company was 32.3% owned by its founder and chairman, Zhang Jimin, and 21.1% owned by Anhui Conch Cement Company Limited (Anhui Conch). WCC was listed on the Hong Kong Stock Exchange in August 2010.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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