OREANDA-NEWS. Fitch Ratings has assigned China Shanshui Cement Group Limited's (Shanshui; BB/Negative) USD500m 7.5% senior unsecured notes due 2020 a final rating of 'BB'. The notes will be issued by Shanshui and guaranteed by Shanshui's subsidiaries incorporated or organised outside of China, except for a subsidiary organised in the United States.

This final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 27 February 2015.

KEY RATING DRIVERS

Slower Deleveraging Progress: Sluggish cement ASP in Shanshui's main markets resulted in weaker cash flow generation in 2014 from a year ago. As Shanshui did not significantly scale back capex and acquisitions in its original budget, 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. With the cement ASP remaining weak, we expect Shanshui to deleverage to below 4x in 2016 at the earliest, later than originally expected, if it does not divest any significant assets. Shanshui's leverage at end-2013 was 5.0x.

Lower ASP: Cement ASP has been under pressure since the Chinese property market slowed down in 2014. For the first half of 2014, Shanshui's cement ASP was CNY240.3/ton, compared with CNY250.5/ton during the same period in 2013. This was mainly due to a 9.9% fall in ASP in northeastern China and a 4% decline in ASP in Shanxi province. However, ASP in Shandong, Shanshui's core market, was stable at CNY240.6/ton (1H13: CNY243.7/ton).

Business Profile Intact: Shanshui's market position remains strong in Shandong, where Shanshui and China National Building Material Co., Ltd (CNBM) together control half of the Shandong cement market, underpinning the healthy ASP. CNBM now owns 16.67% of Shanshui, making it the third-largest shareholder. The tie-up between Shanshui and CNBM could further strengthen their pricing power and profitability.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Cement ASP in Shanshui's main markets remains stable;
- Shanshui's cash gross profit per ton remains stable;
- Total capex (including acquisitions) between 2015-2017 no higher than CNY3bn;
- The company is able to roll over short-term debt and refinance outstanding US dollar bonds.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to the rating Outlook being revised back to Stable include:

- Consolidated gross profit sustained above CNY75/ton
- FFO-adjusted net leverage sustained below 4.0x

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Negative free cash flow (post-capex and acquisition)
- Consolidated gross profit sustained below CNY75/ton
- FFO-adjusted net leverage sustained above 4.0x