S&PGR upgrades Anhui Conch Cement

S&P Global Ratings (S&PGR) today raised its long-term corporate credit rating on Anhui Conch Cement Co. Ltd. (Conch Cement) to 'A' from 'A-'. The outlook is stable.
 
"We raised the rating on Conch Cement because we expect the company to continue to lower its financial leverage over the next 12-24 months owing to a likely improvement in its operating efficiency and a disciplined approach to investment and expansion," the rating's agency said.
 
In its base case, S&PGR expect Conch Cement's leverage, as measured by the ratio of debt to EBITDA, to stay below 1x and the ratio of free operating cash flow (FOCF) to debt to increase to more than 60% over the next two years. It sees  considerable headroom for the company's leverage to remain within the range commensurate with a minimal financial risk profile assessment.
 
S&PGR anticipates that Conch Cement will continue to focus on improving its operating efficiency by lowering production costs. The company's development of low-temperature cogeneration and pollution-reduction technology should support its cost advantage.
 
At the same time, S&PGR believes stabilised selling prices of cement will moderate the impact of an increase in raw material and coal prices and help Conch Cement maintain stable margins over the next two years. In its view, cement prices in the company's core markets will recover on the back of increasing  infrastructure investment and greater supply-demand equilibrium. An elevated standard for facilities that the government introduced will also eliminate inefficient and high-polluting capacity.
 
S&PGR expects Conch Cement to maintain discipline while investing in technology upgrade, new projects, as well as in mergers and acquisitions. "Our view is supported by the company's prudent investment track record over the past couple of years. For example, in 2016, Conch Cement's capital expenditure was  about CNY6bn, materially lower than its budget of CNY10bn. In our view, the company's ability to generate very strong operating cash flows and its selectiveness in investments will support its healthy free cash flows over the next two years," it said in a statement.
 
S&PGR also expects Conch Cement to lower its debt leverage over next 12-24 months. The company has high cash holdings of about CNY20.5bn as of June 30, 2017, which could sufficiently cover its outstanding debt of CNY16.3bn. 
 
The stable outlook reflects S&PGR's expectation that Conch Cement will generate healthy cash flows from operations over the next two years, supported by its large operating scale, strong market position, and above-average profitability. This, together with the company's disciplined investment and
expansion, should help it to maintain its debt-to-EBITDA ratio below 1x over the period.