10.08.2015, 09:27
Fitch Publishes Anhui Conch Cement's Rating of 'A-'/Stable
OREANDA-NEWS. Fitch Ratings has published Anhui Conch Cement Company Limited's (Conch) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating of 'A-'. The Outlook on the IDR is Stable.
Conch is one of the largest cement producers in China. Its principle business includes the manufacturing and selling of cement, clinker and aggregate products. Its credit assessment is driven by its geographically diversified operations, low-cost advantages, strong financial profile and improving market dynamics. These factors, in Fitch's opinion, put Conch in a better position to cope with the current industry down-cycle.
KEY RATING DRIVERS
Low-Cost Industry Leader: Conch consistently reports higher gross profit per tonne than its peers. Its cost advantages are driven by economies of scale; strategic site locations with direct access to cheap water transport and limestone resources, and vertically integrated operations; 100% self-sufficiency in limestone resources, as well as self-owned and operated ports for transportation and distribution.
Diversified National Presence: Unlike many major listed cement producers in China which generate a dominant portion of their revenue from one region, Conch has a diversified nationwide presence, with 32%, 27%, 20% and 18% of its 2014 revenue generated from China's east, central, west and south regions, respectively. Each region has a very different market and growth dynamic, given the regional nature of the cement industry. Therefore, we feel that Conch's nationwide presence mitigates its significant exposure to China.
Market Dynamics to Improve: We expect cement demand growth to remain in the low single digits in the next few years, while we do see a better supply discipline - driven by tighter control on new capacity additions, obsolete capacity shutdowns, lower return on investment, and more stringent environmental standards. As a result, we expect improving utilisation rates for cement plants. We also expect market concentration to increase, resulting in improving margins in the long term.
Very Strong Financial Metrics: Conch exhibits a relatively stable and strong financial profile despite the cyclical nature of the business, with a relatively wide earnings margin, combined with low leverage, healthy liquidity and strong debt-service coverage. Conch has maintained strong coverage levels relative to its peers through the cycle over the last 10 years. Conch also began generating FCF in 2012, due to better working-capital management and a slowdown in capex. We expect the company to continue to generate FCF.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Operating EBITDA margin maintained at 30% between 2015 to 2017
- Revenue growth of -1.4%, 6.6% and 10% in 2015, 2016 and 2017, respectively
RATING SENSITIVITIES
Positive: No positive rating action envisaged
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Failure to generate FCF on a sustained basis
- Aggressive acquisitions at the expense of margin erosion and credit metric deterioration
- FFO net leverage above 1.0x on a sustained basis
- EBITDA margin below 25% on a sustained basis
Conch is one of the largest cement producers in China. Its principle business includes the manufacturing and selling of cement, clinker and aggregate products. Its credit assessment is driven by its geographically diversified operations, low-cost advantages, strong financial profile and improving market dynamics. These factors, in Fitch's opinion, put Conch in a better position to cope with the current industry down-cycle.
KEY RATING DRIVERS
Low-Cost Industry Leader: Conch consistently reports higher gross profit per tonne than its peers. Its cost advantages are driven by economies of scale; strategic site locations with direct access to cheap water transport and limestone resources, and vertically integrated operations; 100% self-sufficiency in limestone resources, as well as self-owned and operated ports for transportation and distribution.
Diversified National Presence: Unlike many major listed cement producers in China which generate a dominant portion of their revenue from one region, Conch has a diversified nationwide presence, with 32%, 27%, 20% and 18% of its 2014 revenue generated from China's east, central, west and south regions, respectively. Each region has a very different market and growth dynamic, given the regional nature of the cement industry. Therefore, we feel that Conch's nationwide presence mitigates its significant exposure to China.
Market Dynamics to Improve: We expect cement demand growth to remain in the low single digits in the next few years, while we do see a better supply discipline - driven by tighter control on new capacity additions, obsolete capacity shutdowns, lower return on investment, and more stringent environmental standards. As a result, we expect improving utilisation rates for cement plants. We also expect market concentration to increase, resulting in improving margins in the long term.
Very Strong Financial Metrics: Conch exhibits a relatively stable and strong financial profile despite the cyclical nature of the business, with a relatively wide earnings margin, combined with low leverage, healthy liquidity and strong debt-service coverage. Conch has maintained strong coverage levels relative to its peers through the cycle over the last 10 years. Conch also began generating FCF in 2012, due to better working-capital management and a slowdown in capex. We expect the company to continue to generate FCF.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Operating EBITDA margin maintained at 30% between 2015 to 2017
- Revenue growth of -1.4%, 6.6% and 10% in 2015, 2016 and 2017, respectively
RATING SENSITIVITIES
Positive: No positive rating action envisaged
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Failure to generate FCF on a sustained basis
- Aggressive acquisitions at the expense of margin erosion and credit metric deterioration
- FFO net leverage above 1.0x on a sustained basis
- EBITDA margin below 25% on a sustained basis
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