Fitch Ratings has revised China Shanshui Cement Group Ltd's Outlook to Negative from Stable. Meanwhile, Shanshui's Long-Term Issuer Default Rating (IDR) and senior unsecured ratings have been affirmed at 'BB'.
The Outlook revision reflects Shanshui's slower-than-expected deleveraging process, mainly driven by weaker cash flow generation due to the lower cement average sell price (ASP). "We expect Shanshui to be able to sustain its financial leverage, measured by FFO adjusted net leverage ratio, below 4x only after 2015. Any further market deterioration or lack of discipline in capex and acquisitions could lead to its leverage remaining above 4x for a longer period," the rating's agency said in a statement. Shanshui's leverage at end-2013 was 5.0x, but the company has been reducing capex.
Key rating's drivers
Lower average selling price (ASP)
Cement ASP has been under pressure since the Chinese property market slowed down in 2014, Fitch notes. For the first half of 2014, Shanshui's cement ASP was CNY240.3/t (US$38.6), compared with CNY250.5/t during the same period in 2013. This was mainly due to a 9.9 per cent fall in ASP in northeastern China and a four per cent decline in ASP in Shanxi province, although ASP in Shandong province was stable at CNY240.6/t (1H13: CNY243.7/t). This steady ASP in Shandong, Shanshui's core market, supports its stable business profile.
Slower deleveraging progress
The lower ASP resulted in weaker cash flow generation by Shanshui. Fitch expects the company's leverage to remain above 4x even though it received HKD1.56bn in cash at end-2014 from an equity stake sale, because Shanshui did not significantly scale back capex and acquisitions that were in its original budget. "With the cement ASP continuing to remain low, we expect the company to deleverage to below 4x in 2016 at the earliest, later than originally expected, if it does not divest any significant assets," Fitch said.
Business profile intact
Shanshui's market position remains strong, especially in Shandong province, where the cement ASP has remained steady, Fitch highlights. China National Building Material Co, Ltd (CNBM) now owns 16.67 per cent of Shanshui, making it the third largest shareholder, after it bought a stake in Shanshui in November 2014. In the past, Shanshui and CNBM controlled half of the Shandong cement market, underpinning the healthy cement ASP in Shandong. "The tie-up between the two companies could further strengthen their pricing power and profitability," according to the rating's agency.
