Moody’s: West China Cement investment slowdown ‘positive sign’

West China Cement’s (WCC) slowdown in investments is also a positive, according to Moody's analyst, Jiming Zou, lead analyst for WCC.

WCC's shift from an aggressive expansion strategy to more prudent financial management follows the need to stabilise its capital structure, Moody’s highlighted in a statement. "This approach is necessary as it will need to refinance offshore debt in January 2016. It also reflects less pressure on WCC to increase market share, given a stabilising competitive landscape in Shaanxi province after market consolidation in 2012, the ratings agency added. A slowdown in expansion will also allow more management resources to focus on cost control and production efficiency,” Zou said.

In 2011, the company slowed capital expenditure to about CNY892m in 2012 from CNY2.3bn. Its capital spending commitment of only CNY450 in 2013 is expected to be well covered by operating cash flow.

Results in line with expectations

Moody's said that WCC's 2012 results were in-line with its expectations. WCC achieved 10.5 per cent sales growth, owing to a volume contribution of 22.2 per cent largely from newly commissioned cement plants. A relatively weak operating environment and price competition caused a 10 per cent drop in average selling prices in 2012 from 2011. Nevertheless, the company's operating margin remained at around 17 per cent in 2012, a strong level when compared to its peers, thanks to its well-established market position in the south of Shaanxi province.

WCC indicated a shift in its priorities in 2013 to reducing net debt with a target of repaying its USD notes in January 2016. It also reflects less pressure on WCC to increase market share, given a stabilising competitive landscape in Shaanxi province after market consolidation in 2012. A slowdown in expansion will also allow more management resources to focus on cost control and production efficiency.

The company's B1 corporate family and senior unsecured ratings remain unchanged, said Moody's.  "WCC's debt leverage at end-2012 was in line with our expectations and commensurate with its B1 ratings," Zou said.  "WCC's financial leverage could further improve, if the company continues to prioritise in 2013 its reduction of net debt and carefully carries out its investment plans," adds Zou.

Should the company demonstrate a track record of financial prudence and measured capital expenditure, then Moody's would consider changing the rating outlook to stable from negative, it highlighted.

Improved pricing environment

Currently, Moody's expects pricing improvements in 2013 after the cement industry further consolidated in 2012. Moody's also expects WCC's operating performance to slightly improve with higher capacity utilisation, thanks to increasing visibility in infrastructure spending in Shaanxi province.