Fitch Ratings has affirmed Anhui Conch Cement Company Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A'.
The Outlook is Stable.
The affirmation reflects Conch's ability to generate strong cash flow amid an industry-wide downturn due to its low-cost position, allowing it to maintain a strong net cash position. The Stable Outlook reflects our expectation that the company will remain committed to its prudent financial policy despite its efforts to diversify geographically and into non-cement businesses.
Key Rating Drivers
Resilient Performance during Downturn: Conch's cash flow and EBITDA remained robust during a sharp industry downturn in China in 2023, mostly due to its position as the largest cement producer in the country with over 14% of national market share (2022: 13%), as well as its cost advantages due to a number of factors, such as strategic site locations and vertically integrated operations. As a result, Conch had EBITDA of over CNY20 billion in 2023, with its profit before tax accounting for 43% of industry profit (2022: 29%), while 70% of industry peers recorded net losses.
Structural Decline in China Cement: The Chinese cement market's volume and average selling price (ASP) continued to decline in 2023 due to persistent weakness in the property market, which generally accounts for 30% of total cement usage. Sales volume fell by 3.8% to just over 2 billion tonnes, the lowest in 13 years, and the national average ASP dropped by close to 15% yoy, or the lowest in six years, according to the China Cement Association.
We expect volume in China to fall by a low single-digit rate in 2024 as the property market remains under pressure. However, producers' margins may recover slightly due to lower prices for coal, a main raw material used in cement production. We do not expect any demand growth in the next one to three years, as the property market is likely to remain weak while demand from new infrastructure projects is likely to diminish. As such, we expect more rapid market consolidation as higher-cost producers exit the market, and Conch will benefit from growing market share.
Capex, Dividend Discipline: Conch reduced capex in 2023 to CNY14 billion, from CNY27 billion in 2022, when the company spent heavily on green energy transition projects, such as solar power generation. Dividend payouts also plummeted to just over CNY7.8 billion from CNY12.6 billion in the same period. As a result, its pre-dividend FCF margin returned to 4% in 2023, from -12% a year earlier. We expect Conch to be FCF neutral post-dividends over 2024-2026, as the company has expressed commitment to maintain its high net cash position of at least CNY40 billion (2023: CNY46 billion).
Ratings Dependent on Remaining Exceptional: Conch's ratings are highly dependent on its ability to maintain its dominant market share and generate profit despite the structural decline in China's cement market, along with its ability to maintain its high net cash position. The company is currently expanding into areas outside of cement, as well as outside of China for growth, but we do not expect Conch to materially deviate from its current business and financial policies.
Derivation Summary
Conch is rated above that of most issuers in the building-material sector because of its exceptionally strong business profile that is characterised by significant cost advantages and a leading market position. This allows the company to maintain strong cash flow generation even in industry troughs. The company's deep net cash position also differentiates it from other major cement peers. As a result, Conch is compared against large, 'A' category basic material producers rather than building-material peers.
Conch is rated one notch higher than US-based steel producer Nucor Corporation (A-/Stable). Both Conch's and Nucor's business margins are affected by economic cycles, and raw material costs. Nucor's margins were lower than Conch's margins for its respective core business. Conch has been in a net cash position resulting in a consistently lower net leverage than Nucor. Both Nucor and Conch have strong interest coverage.
Conch is rated at the same level as Rio Tinto Plc (A/Stable). Rio Tinto's ratings are supported by its strong cost position, as it is situated in the first and second quartiles of its operating assets. However, its final product exposures are largely cyclical, such as steel and other basic materials. This is similar to Conch's business profile in end-market application and its cost leading position. However, Rio Tinto is an upstream miner with limited cost exposure to raw material variables, which allows it to generate much higher margin. We believe this is offset by Conch's stronger financial profile with net cash position.
The mid-points of Conch's Market Position, Cost Position, Profitability and Financial Structure factors are assessed in the 'a' category, higher than the 'bbb' category upper-boundary of the Building Materials sector navigator. This is due to the company's exceptional business profile and market position, which reduce its business risks relative to peers, and its superior financial profile with credit metrics significantly better than the thresholds for a 'bbb' category assessment in the sector navigator.
Key Assumptions
Capex of CNY13 billion each year over 2024-2026 (2023: CNY14.2 billion);
Operating EBITDA margin of 16.7% in 2024, 18.5% in 2025 and 19.0% in 2026 (2023: 14.2%);
Sales revenue to decrease by 9% in 2024, and increase by 5% in 2025, and 3% in 2026 (2023: 8%);
Dividend payout ratio at around 50% over 2024-2026
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Successful transition into a more diversified and less cyclical business profile without compromising the financial profile
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Failure to generate pre-dividend FCF of 3% and neutral post-dividend FCF, resulting in a loss of its sustained high net cash position
Any loss in market share or dominance in industry profits in China
Liquidity and Debt Structure
Strong Liquidity: Conch was in a net cash position at end-2023 with total available cash of CNY68 billion, against total debt of CNY23 billion. We expect Conch to maintain its net cash position of over CNY40 billion in 2024-2026.
Issuer Profile
Conch is one of the largest cement producers in China by sales volume. It has 14% market share in China by sales volume (excluding trading in 2023). Its principle businesses include the manufacturing and selling of cement, clinker and aggregate products.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
ANHUI CONCH CEMENT COMPANY LIMITED 
