OREANDA-NEWS. Fitch Ratings has revised West China Cement Limited's (WCC) Outlook from Negative to Stable. Its Long-Term Issuer Default Rating (IDR), senior unsecured and bonds ratings have been affirmed at BB-. The change in Outlook reflects WCC's strengthened position in its core Shaanxi market and its improved leverage, following the recent equity placement to Anhui Conch Cement Company Limited (Conch), the most profitable cement company in China.

KEY RATING DRIVERS
Conch Ties Strengthen Market Leadership: Collaborating with conch will strengthen WCC's market position in Shaanxi in our view. On June 19 2015, WCC announced it placed 903 million new shares to Conch for HK\$1.5b (CNY 1.2b). After the transaction, Zhang Jimin's (Chairman) ownership will be diluted to 32.4% from 38.9%, with Conch becoming its second largest shareholder, and owning 16.67%. The combined market share of WCC and Conch was 47% in 2014. Though WCC is the largest player in Shaanxi, it has a smaller scale compared to Conch which has greater geographical diversification.

Improving market dynamics: The partnership between Conch and WCC can bring about a more rapid transition to a disciplined supply side in the Shaanxi Cement market. Conch has been playing a significant role in initiating price competition in Shaanxi to squeeze out competitors. A combination of Conch's and WCC's Shaanxi cement assets can result in the formulation of a more cohesive strategy to limit cut-throat competition and maintain rational production of cement in the province. The effectiveness of their business strategy is multiplied with their enlarged market share.

Placement Strengthened Financial Profile: The recent equity placement to Conch will strengthen the company's cash position and reduce the company's leverage from 3.5x in 2014 to 2.0x in 2015, by our estimate.

Acquisition risk remains: According to the company, it will use the proceeds for general working capital and future potential acquisitions and/or other investment opportunities. There's a risk that the company might use up its equity placement proceeds for acquisition rather than deleveraging and should the company overpay its acquisition.

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

- Free cash flow (post acquisition) turns negative
- FFO adjusted net leverage rising above 3.0x on a sustained basis
- Losing its dominant market position in southern Shaanxi

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Reduced occurrence and duration of price war in core Shaanxi market
- FFO adjusted net leverage reduced below 1.5x on a sustained basis
- GP/ton rise above CNY 100/tonne on a sustained basis