OREANDA-NEWS. Fitch Ratings has affirmed Anhui Conch Cement Company Limited's (Conch) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook on the IDR is Stable.

The affirmations reflect Conch's leading position in China's cement production market, its low-cost advantages and strong credit metrics, which have remained intact even as the market remains depressed. The Stable Outlook reflects Fitch's expectation that the cement price and volume are not likely to deteriorate from their current levels, although the market trough will likely persist beyond 2016.

KEY RATING DRIVERS

Market Weakness to Continue: The average cement price in China declined 11% in 1H16 (13% decline in 2015) even as demand increased as evidenced by production volume increase of 7% during the same period (6% fall in 2015). This was driven primarily by industry overcapacity, which Fitch expects to persist in 2016 as elimination of obsolete capacity has been slow.

Low Costs Drive Outperformance: Conch's performance has not been immune to the market conditions. Revenue fell 16% in 2015 and EBITDA margin declined to 26% from 32% a year earlier. However, Conch's low costs, which stem from its economies of scale, strategic site locations and vertical integration, have helped the company to continue to outperform the industry. For instance, its 2015 profit of CNY7.5bn declined 32.5% compared with the overall Chinese cement industry's 57% fall.

Fitch expects Conch to maintain EBITDA margin in 2016 at about the 2015 level as the weakness in average selling prices is likely to be offset by the improving cost efficiency. Overall EBITDA may rise by about 10% driven by organic volume growth and acquisitions. However, any unexpected further decline in gross margin per tonne (before depreciation) below CNY70/tonne (2015: CNY72/tonne) may lead to rating pressure.

Improving Market Position: Conch has been taking advantage of the industry downturn to acquire some high-quality competitors. Conch's nationwide market share increased to 11% in 2015 from 10% a year ago, and it has also extended its lead in its core markets of eastern and central China. We expect Conch to continue making acquisitions to improve its scale and strengthen its pricing and bargaining power in the market. However, the company is likely to exercise the same level of discipline it has shown in the past in acquisitions. Past acquisitions have generally been funded from internal cash generation and highly cash accretive.

Strong Financials Amid Volatility: Conch has a strong balance sheet and was able to maintain a low leverage despite the market downturn. In 2015, Conch's funds from operations (FFO) and cash flow from operations (CFO) declined by 38% and 47%, respectively, on the back of lower EBITDA margins due to poor market conditions. However, the company was able to keep its leverage low with FFO net adjusted leverage increasing to 0.5x in 2015 from 0.4x in 2014. This is much lower than most of its peers in cyclical industries, showcasing the company's ability to manage volatility.

KEY ASSUMPTIONS

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

- EBITDA margin of 26% in 2016, 2017 and 2018

- Conch maintains its market position and competitiveness

RATING SENSITIVITIES

Positive: No positive rating actions envisaged.

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

- Failure to generate free cash flow on a sustained basis

- FFO net leverage above 1.0x on a sustained basis, potentially driven by aggressive acquisitions

- Gross price per tonne (before depreciation) below CNY70/tonne on a sustained basis (2015: CNY72/tonne, 2014: CNY97/tonne)