FITCH REVISES WEST CHINA CEMENT'S OUTLOOK TO 'NEGATIVE'

FITCH REVISES WEST CHINA CEMENT'S OUTLOOK TO 'NEGATIVE'

Ratings Endorsement Policy 31 Jul 2013

Fitch Ratings-Hong Kong-31 July 2013: Fitch Ratings has revised West China Cement Limited's (WCC) Outlook to Negative from Stable. Its Long-Term Issuer Default Rating (IDR) and senior unsecured rating have been affirmed at 'BB-'.

The Outlook change reflects continued weak average selling prices (ASP) of cement in Shaanxi and Xinjiang, WCC's core markets. If this trend persists, the company may face challenges in repaying its outstanding USD400m notes due in January 2016.

Key Rating Drivers

Weak ASPs lower margins: Continued weak ASPs have compressed WCC's gross profit to CNY47/ton in 2012 from CNY76/ton for 2011. ASP was CNY238/ton in 2012, down from CNY264/ton for 2011. Declines in the price of thermal coal - an input of cement - 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% 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% YoY in Shaanxi province, and 29% 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 USD400m senior unsecured bond due January 2016 and onshore CNY800m 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 to 2015, 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.

Liquidity not immediate concern: At end-2012, WCC only had CNY518m cash at hand (including restricted deposits) compared with short-term borrowings of CNY1.178bn. However, Fitch does not view WCC's liquidity as an immediate risk as the company is able to roll over its short-term loans, due to the asset-based lending nature of Chinese lenders and WCC's fixed assets available for collateral. In addition, WCC has used part of its March 2013 MTN proceeds to repay some of the short-term loans and to improve its debt structure.