Fitch Ratings has downgraded West China Cement Ltd’s (WCC) long-term issuer default rating (IDR) and its senior unsecured debt rating from BB to BB- due to the cement producer's aggressive capex, primarily outside China. The outlook on the IDR is negative. According to Fitch, WCC has been investing heavily since 2021 with a focus on overseas markets, resulting in higher leverage and persistently negative free cash flow.
In 2022 West China spent CNY3bn (US$412.7m) in capex, 84 per cent of which was for its overseas operations. Capex is expected to remain high at CNY2.5bn in 2023 and CNY2.7bn the following year, almost all of which is destined for overseas markets.
“The negative outlook reflects business risk, due to the company’s unwillingness to curb capex, particularly during an industry downcycle in its core markets in China,” says Fitch. “WCC's increasing exposure in overseas markets provides diversification benefits such as higher margins in the long term. Even so, we see execution risks because of its rapid investments in new markets, many of which have significantly higher operating environment risks than in China.
“Most of WCC's capex since 2022 was funded by its US$600m senior notes issued in July 2021 as well as its cash generated from operations. Its cash balance decreased to CNY1.2bn by end-June 2023, from CNY3.5bn at end-2021, and its cash weakened to 32 per cent of short-term debt by end-June 2023 from 108 per cent at end-2021. The weakening cash generation from its operations in China means we expect WCC to rely on long-term financing to fund the gap between its overseas operating cash flow and overseas capex to prevent further weakening of liquidity,” added Fitch.
