Fitch revises West China Cement outlook

Fitch Ratings has revised West China Cement Limited's (WCC) Outlook to Negative from Stable reflecting continued weak average selling prices (ASP) in the cement producer's core cement markets of Shaanxi and Xinjiang. If this trend persists, the company may face challenges in repaying its outstanding US$400m notes due in January 2016, cautions the ratings agency.

Continued weak ASPs have compressed WCC's gross profit to CNY47/t (US$7.67) in 2012 from CNY76/t for 2011. The ASP was CNY238/t in 2012, down from CNY264/t for 2011. Declines in the price of thermal coal during the same period was unable to offset the impact from weak ASPs, which were due to overcapacity. Industry data shows nationwide utilisation rate for cement production was just 72 per cent during 2012.

Inability to deleverage

WCC generated EBITDA of CNY1.06bn in 2012, which pushed its leverage to 3.2x, higher than the negative rating guideline of 3.0x. Based on Fitch's forecasts for 2013 ASP and WCC's profit margins, the leverage may remain higher than 3.0x for 2013. Latest industry data shows that ASP of P.O.42.5 cement in July dropped 14 per cent YoY in Shaanxi province, and 29 per cent YoY in Xinjiang. Although WCC's ASPs should not deteriorate at the same rapid pace in its core market Southern Shaanxi, Fitch does not expect WCC's 2013 EBITDA to be materially higher than in 2012, even as thermal coal prices in the region continue to fall.

Cash accumulation needed

WCC has an outstanding US$400m senior unsecured bond due January 2016 and onshore CNY800m medium term notes (MTNs) due in March 2016. Fitch forecasts show that the company will need to generate around CNY4.5bn-CNY5bn EBITDA over the period of 2013-15, before cash absorption from its CNY1.3bn capex budget and regular dividend payout, to meet these obligations without external financing.

The current trend of weak ASPs and low gross profit per ton suggests WCC may be challenged to achieve this EBITDA target. Nonetheless, the company still has the flexibility to scale back capex and dividend payout before 2015.