UPDATE 2: West China Cement Says to Repay $600M 4.95% Due 2026 Notes With Cash Flow, Capex Funds From 2025; Expects Overseas Cement Sales to Reach 3.5M, 10M Tonnes in H2’24, 2025, Gross Profit ~CNY 400 Per Tonne Sold Overseas

Fri Aug 23, 2024 06:50 AM ET: Management of Chinese cement manufacturer and distributor West China Cement Ltd. told certain investors at one-on-one and small group meetings held Thursday, Aug. 22 that the company plans to fund the repayment of its $600 million 4.95% notes due July 2026 with funds set aside for capital expenditure as well as free cash flow generated from offshore projects from 2025, according to five sources who attended the meetings.

Other options under consideration to partly fund the due-2026 notes’ repayment include an onshore medium-term note issuance, according to two of the sources. One of the two sources also added, citing management, that borrowing offshore loans is also an option for the notes’ payment.

Management also said it expects to pay interest on the 4.95% notes with cash from offshore projects starting from 2025.

West China Cement’s $600 million 4.95% due July 2026 notes were indicated at 73.75/ 74.25 today, down half a point, according to two buysiders.

West China Cement operates cement plants across African countries including Ethiopia, Democratic Republic of the Congo, or D.R. Congo, and Mozambique, as well as in central Asia’s Uzbekistan. It is also building new cement facilities in Mozambique, Uganda and Zimbabwe. In China, the company owns plants in provinces including Shaanxi, Xinjiang and Guizhou.

Sales Guidance

See below for West China Cement’s offshore sales guidance for the second half of 2024 and 2025, offered by management at the meetings:
 
Management also said the company expects to record CNY 350 ($49.1) to CNY 400 in average gross profit per tonne of total overseas cement sold.

As for its onshore business in China, the company guided a whole-year sales target of 16 million tonnes of cement in 2024, with a gross profit of CNY 40 to CNY 50 per tonne of cement sold.

Offshore Project Loans

West China Cement borrowed a $120 million 12% 12-year project loan due 2036 backing its Lemi project in Ethiopia, and expects to cover its annual amortizations with cash denominated in the Ethiopian Birr from the respective project company, according to management. The cement producer will draw down the remaining $100 million of the loan this year after an initial $20 million drawdown in 2023, management noted.

The company also obtained a $150 million SOFR+5% seven-year project loan due 2030 to finance its operations in D.R. Congo. As the facility allows for a two year-extension option, West China Cement will start making amortization payments from 2025, management said.

Apart from the outstanding borrowings, management said they are also in talks with Standard Chartered Bank for a $155 million loan to back its new plant in Nampula, Mozambique. The loan will finance 70% of the plant construction, with West China Cement to fund the rest 30% with its own capital. As reported, management said it expects the plant to commence production at the end of 2025 during its earning briefing held Tuesday, Aug. 20.

For its new plant in Uganda, West China Cement said it is expecting a total $250 million of investment, of which about 70% is set to be covered by bank loans. The company is looking to negotiate with local banks in South Africa for loans with a rate around SOFR+5% and a tenor of six to eight years, management said.

Onshore Financings

West China Cement doesn’t have offshore maturities before the $600 million due July 2026 notes, management said. Onshore, the company has bank loans totalling CNY 4 billion to CNY 5 billion with an average interest rate below 4%, which management said it sees no issues in refinancing.

Management said the cement producer also holds CNY 1 billion of credit lines from Chinese banks. Currently, its onshore free cash flow stands around CNY 1.5 billion every year, the company said.

Disclosure Plan

The Hong Kong-listed cement manufacturer also told investors it is considering stepping up disclosure of its overseas operations through quarterly, or even monthly updates, which will be announced to its website or the Hong Kong stock exchange. Such updates will consist of sales and prices in respect to each region, management said.

– Ziyu Zhang

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UPDATE 1: EARNINGS BRIEFING: West China Cement Says to Prioritize $600M 4.95% Due 2026 Notes Repayment in Capex Plans From 2025; Co. Expects ~40% Overseas Profit Hike in H2‘24

Tue Aug 20, 2024 07:04 AM ET: Management of Chinese cement manufacturer and distributor West China Cement Ltd. said that the company will prioritize repaying its $600 million 4.95% notes due July 2026 over project developments when planning capital expenditures from 2025, at an investor meeting this morning, Aug. 20, attended by Reorg.

Company chairman Zhang Jimin promised holders of the due 2026 note at today’s meeting that they will be repaid on time.

West China Cement says it expects annual capital expenditures to stand around $300 million.

In the first half of 2024, West China Cement’s overseas business, which generated about 90% of its first half profits, underperformed its targets due to unexpected challenges in Ethiopia and Democratic Republic of the Congo operations - but management said the risks remain manageable.

Ethiopia
Ethiopia’s unexpected restrictions on coal imports imposed in February forced West China Cement to rely solely on lower-quality local coal resources in the second quarter. As a result, average daily cement production in the country plunged 40% to around 2,000 tons from 3,200 tons, leading to a total $10 million reduction in profits for the first half of 2024, management said.

West China Cement said it has managed to restore coal imports with its own foreign exchange quota from July, and believes that profits shouldn’t be impacted since then.

Management also noted that it expects its plant located in Lemi, Amhara State, Ethiopia to commence production around the end of August. The plant, equipped with a daily production capacity of 10,000 tons of clinker, was originally planned to commence production in May. West China Cement blamed external factors for the three-month delay which cost the company CNY 400 million ($56.1 million) to CNY 500 million in profits.

Management also mentioned it has been in talks with the Ethiopian government for months to raise cement factory prices to offset elevated costs as a result of the sharp depreciation of its currency, the Ethiopian Birr, against the dollar after the nation decided to relax foreign exchange curbs. Discussions around a cement factory price hike are set to conclude by the end of August.

While an Ethiopian factory price hike remains uncertain, management said the impact of the forex policy shift on its profits will be limited; even without raising the Ethiopian factory prices, the company said its overseas business is guaranteed to generate over CNY 100 million in monthly profits.

Democratic Republic of the Congo
Production at West China Cement’s Great Lakes plant located in eastern D.R. Congo underperformed expectations due to a number of challenges, including a local port collapse and road damages amid heavy rains, which took the company five months till July to complete maintenance works, management said.

Management noted that now as operations in the Great Lakes region are restored to normal, monthly cement sales is set to reach 100,000 tons from August.

Mozambique
Management attributed a 2% drop in Mozambique cement sales in the six months ended June 30 to a presidential election scheduled to take place in October 2024. With the election in the spotlight, less attention was drawn to economic development, resulting in a 3% to 5% drop in cement demand nationwide, according to management.

Looking forward, West China Cement said it has started construction of its new plant in Nampula in north Mozambique, and that production is set to start at the end of 2025. The company also guided a similar timeline for a plant under construction located in Uganda at today’s conference. It has also planned a new plant in Zimbabwe, management said. Such project construction will be 60% financed by local bank borrowings, with the rest to be funded by the company’s own cash.

The cement producer expects total overseas production capacity to reach 12 million tons after Ethiopia’s Lemi plant is put into operation, and further rise to 18 million tons in 2025 when the other new plants commence production, according to management.

Uzbekistan
In the Andijan region of Uzbekistan, a new production line with an annual production capacity of 2.5 million tons kicked off production in May 2024, according to management.

Management also noted heated competition of Chinese cement manufacturers in the central Asian country.

West China Cement management said 2024 has been the toughest year for the company in terms of market conditions and capacity utilization rate, but the company is confident that profitability will improve in the second half of the year.

The company expects overseas profits to rise by around 40% in the second half from the CNY 587.1 million recorded in the first half, and sees a better outlook for 2025, said management.

– Ziyu Zhang

Below is West China Cement's capital structure updated to June 30, 2024:
 

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Original Story 11:27 p.m. UTC on Aug. 19, 2024

EARNINGS: West China Cement H1’24 Revenue Down 16% YoY to CNY 3.7B as Volumes, ASPs Drop; Shaanxi, Ethiopia Underperform; EBITDA Down 15% YoY to CNY 1.3B; Ethiopian Currency Devalues >50%

Relevant Documents:
1H24 Results
1H24 Corporate Presentation

Hong Kong-listed Chinese cement manufacturer West China Cement Ltd., or WCC, announced to the Hong Kong stock exchange on Aug. 19 its interim financial results for the six months ended June 30. The company reported a 15.8% year-over-year decline in revenue to CNY 3.7 billion ($474.2 million), driven by a significant drop in sales in the Chinese market. EBITDA decreased by 15.4% year over year to CNY 1.28 billion, with a stable EBITDA margin of 34.7%.

Cement sales volume fell by 9.7% to 8.25 million tons in the first half of 2024, primarily due to challenging conditions in both China and overseas markets. First half 2024 sales volumes in Shaanxi, Xinjiang, and Guizhou provinces fell year over year by 8.9%, 11.4%, and 32.1% to 5.95 million tons, 0.78 million tons, and 0.36 million tons, respectively.

Overseas, first half 2024 sales volumes in Mozambique and Ethiopia dropped year over year by 2.7% and 36.4% to 0.72 million tons and 0.42 million tons, respectively. WCC attributed the decline in Ethiopia to production halts due to overhauls in the first quarter and an unstable local coal supply following the government's coal import ban. Despite these challenges, the company remains optimistic about the long-term prospects in Ethiopia.

A breakdown of product sales volume is as follows:
Average selling prices, or ASPs, in China weakened during the first half of 2024, with blended cement ASP falling to CNY 344 per ton from CNY 383 per ton in the first half of 2023. In the core Shaanxi market, ASP decreased by 19.5% year over year to CNY 244 per ton.

A regional revenue breakdown is as follows:
First half 2024 segment profit for overseas market was reported at CNY 587.1 million, compared with CNY 68.5 million for Mainland China.

WCC’s gross profit for the first half of 2024 fell by 20.2% year over year to CNY 985.1 million, with the gross margin decreasing to 26.6% in the first half of 2024 from 28.1% in the same period last year. Despite this, the company maintained a stable EBITDA margin at 34.7%, compared with 34.5% in the first half of 2023.

As of June 30, WCC held CNY 1 billion in cash and equivalents, slightly higher than the CNY 922 million at the end of 2023. Restricted cash increased from CNY 1.2 billion to CNY 1.9 billion over the same period. Total borrowings rose from CNY 10.7 billion at the end of 2023 to CNY 11.8 billion as of June 30, leading to an increase in net debt from CNY 9.8 billion to CNY 10.7 billion.

WCC spent CNY 1.6 billion on capex in the first half of 2024, up 109% from CNY 764.6 million in the same period of 2023. The company does not plan to expand capacity further in 2024, focusing instead on maintenance capex, upgrading existing facilities, and constructing new production facilities in Ethiopia and Uzbekistan.

Capital commitments as of June 30 amounted to CNY 1.8 billion, down from CNY 2.7 billion at the end of 2023. The company’s Lemi plant in Ethiopia is expected to commence production soon, while its Andijan project in Uzbekistan began production in May 2024.

WCC further disclosed that the Ethiopian Birr devalued by over 50% against major currencies following a major revision of the country's foreign exchange system on July 29, according to the National Bank of Ethiopia. This devaluation is expected to significantly impact the company’s consolidated financial statements, which are presented in CNY.

WCC’s capital structure is below: