Duration Financial News, on December 1, Moody's Huaxin Cement Co., Ltd, ltd., referred to as "Huaxin Cement", 06655hk，600801.SH) downgraded its outlook to negative from stable.
At the same time, Moody's affirmed the issuer rating of Huaxin Cement at "BAA1" and the bonds issued by Huaxin Cement International Finance Company Limited, an indirect wholly-owned subsidiary of Huaxin Cement, with a senior unsecured rating of the bonds unconditionally and irrevocably guaranteed by Huaxin Cement. Moody's also downgraded Huaxin Cement International Finance***'s rating outlook to negative from stable.
Roy Zhang, vice president and senior analyst at Moody's, said: "The negative outlook reflects a prolonged period of weakness in the real estate sector, which will structurally reduce demand in the cement sector and put pressure on margins. These risks have reduced Huaxin Cement's financial buffer and increased uncertainty on its path to recovery. ”
The confirmation of the rating reflects Huaxin Cement's solid operation, diversified business structure, prudent financial management, healthy capital structure and good liquidity. The above factors will help the company cope with the increasingly difficult operating environment," Zhang added.
Rating justification. Huaxin Cement's "BAA1" issuer rating reflects the company's position as a leading cement producer in China, with a long operating history and a strong market position in its core markets. The rating is also supported by the company's prudent financial management and good access to financing.
On the other hand, the rating is constrained by the weak operating environment and inherent cyclical nature of the building materials industry.
Huaxin Cement's financial buffer has narrowed, and Moody's expects its total leverage ratio to increase from 1.2 at the end of 2021 due to the continued downturn in real estate and the slowing economy0 times rose to 2 by the end of 20232 times. The company's free cash flow has been consistently negative since 2021.
The deterioration in the financial position was caused by capital plans related to the company's overseas expansion and diversification into non-cement businesses. Weaker than expected cash flow due to a weak market led to an increase in debt to fund expansion.
To partially offset the negative impact of the challenging operating environment, Huaxin Cement strengthened its business position by further diversifying its business in terms of product and market coverage. In the first half of 2023, its non-cement business accounted for 38% of the company's total revenue and 56% of the company's total net profit, including aggregates, commercial concrete, wall materials, ceramic tiles, lime, equipment and waste disposal.
The company has expanded beyond China and operates in 14 other countries. Moody's expects that in 2023 and 2024, the net profit generated by the overseas cement business will exceed that of the domestic cement business.
Moody's expects increasing revenue contributions from new projects to support its revenue growth in 2024 and 2025. However, uncertainties remain, with a negative outlook given that both the cement and non-cement sectors will be affected by similar demand drivers, including continued weakness in the property market.
Moody's expects the company's leverage to drop to 20x, which is driven by higher EBITDA for new projects and limited debt build-up as the company reduces investment intensity in 2024.
Huaxin Cement has excellent fluidity. As of the end of September 2023, the Company had approximately RMB6.6 billion in cash and similar cash**. This, combined with strong operating cash flow, is sufficient to cover debt, planned capital expenditures and other financial obligations maturing in the next 12 to 18 months.
Environmental, Social and Governance (ESG) considerations
Huaxin Cement's environmental and social risks, including carbon conversion, natural capital, waste and pollution risks, are in line with those of the rated cement producers. The expansion into non-cement businesses has reduced the company's average exposure to the carbon transition. Its prudent financial management and management credibility and track record help mitigate these ESG risks. The Company has a diversified ownership structure, including Holcim Ltd(BAA1 stable) holds its 4146% of the shares.
Factors that may cause an upgrade or downgrade.
Given the negative outlook, an upgrade to the rating is unlikely. If (1) Huaxin Cement continues to adhere to its prudent financial management and gradually rebuilds its financial buffer;and (2) Moody's may raise its outlook to stable as demand for building materials in China begins to stabilize and industry profitability begins to recover.
Specifically, if Huaxin Cement improves its leverage ratio to a sustained level of 20x and continue to generate positive free cash flow, the outlook may be adjusted to stable.
On the other hand, if the company (1) decreases in market share or cost competitiveness;and (2) the implementation of aggressive capital expansion, which has not kept its debt EBITDA ratio below 20x;or (3) failure to maintain prudent financial management, resulting in a reduction in its financial or liquidity buffers, which may result in downgrade pressure.
As of the end of 2022, Huaxin Cement was the fifth-largest cement producer in China by clinker capacity. The company's revenue in 2022 was RMB30.5 billion, as of June 30, 2023, Holcim Ltd(BAA1 stable) holds its 4146% of the shares. The company was listed on the Shanghai ** Stock Exchange in 1994. Huaxin Cement's business covers 16 provinces in China and 14 countries overseas.