OREANDA-NEWS. Fitch Ratings has downgraded West China Cement Limited's (WCC) Long-Term Issuer Default Rating and senior unsecured rating to 'B+' from 'BB-', and removed the Rating Watch Positive (RWP) on the ratings. The Outlook on the IDR is Stable. A full list of ratings is at the end of this commentary.

The removal of the RWP follows the termination of Anhui Conch Cement Company Limited's (Conch; A-/Stable) plans to acquire a controlling stake in WCC. The downgrade is driven by WCC's increased leverage in the current weak operating environment. The Stable Outlook reflects Fitch's expectation that cement prices and volumes in WCC's key markets - and hence its financial performance - are unlikely to deteriorate.

KEY RATING DRIVERS

Acquisition by Conch Terminated: Conch and WCC jointly said on 30 June 2016 that Conch will not take a controlling stake in WCC as the parties did not obtain all necessary regulatory approvals by the targeted completion date. The transaction would have increased WCC's size as Conch would have injected four of its plants into WCC. Furthermore, as a subsidiary of a larger and financially stronger company, WCC would have been able to substantially lower its financial costs. Conch remains as the second-largest shareholder of WCC (owning 21.2%), but it is unclear what actions the two companies can take to improve WCC's business and financial profiles.

Lower Profitability: WCC's performance deteriorated in 2015 as a result of a sustained weakness in the cement market in Shaanxi, its main market. Gross profit/tonne (excluding depreciation) deteriorated to CNY68/tonne in 2015 from CNY69/ton and CNY72/ton in 2014 and 2013, respectively. We do not expect margins to improve meaningfully in the near term as prices continue to be weak. The average cement price in Shaanxi fell 2% in May 2016 from a year earlier.

Higher Leverage: WCC received CNY1.2bn from Conch's acquisition of a stake in 2015, but the company's FFO-adjusted net leverage increased to 4.0x in 2015 from 3.5x in 2014 due to lower profitability, high capex, and a longer cash cycle. We believe it would be hard for WCC to deleverage in the next three years given the low profitability.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- WCC's market share remains stable in Shaanxi

- Average selling price to fall 2% in 2016 and remain unchanged in 2017

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- FFO-adjusted net leverage sustained below 3.5x

- Gross profit per tonne sustained above CNY70

- Sustained positive FCF

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

- FFO-adjusted net leverage sustained above 4.5x

-Gross profit per tonne sustained below CNY50

FULL LIST OF RATINGS

West China Cement Limited

Long-Term IDR downgraded to 'B+' from 'BB-'; Outlook Stable; off RWP

Senior unsecured rating downgraded to 'B+' from 'BB-'; Recovery Rating of 'RR4'; off RWP

Rating on USD400m senior unsecured notes due 2019 downgraded to 'B+' from 'BB-'; Recovery Rating of 'RR4'; off RWP