OREANDA-NEWS. Fitch Ratings has downgraded China Shanshui Cement Group Limited's (Shanshui) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings to 'B-' from 'B+'. The agency has also removed the company from Rating Watch Negative and assigned it a Negative Outlook. The Recovery Rating on the senior unsecured ratings remains at 'RR4'.

The rating downgrade reflects the continued weak business environment and Shanshui's reliance on short-term financing, which could pressure liquidity. The Negative Outlook reflects the lack of visibility as to when the company will refinance its short-term debt with longer-term facilities.

KEY RATING DRIVERS

Poor Profitability in 1H15: Shanshui's EBITDA in 1H15 declined 79% to CNY311m from CNY1,484m in 1H14, due to weakness in the Chinese cement market and one-off expenses. We believe the employee and shareholder disputes that took place in 1H15 also negatively affected the company's operations and contributed to the low profitability.

Market Share Remains Stable: Shanshui's sales fell by 31% year-on-year in 1H15 due to a 21% drop in cement and clinker volume, and a 12% fall in cement price and 16% decrease in clinker price. This is in line with the sharp decline in cement prices and volumes in Shanshui's core markets in Shandong, Liaoning and Shanxi, which were the worst performing areas of China. We believe the cement market will remain subdued in the rest of 2015, but is not likely to deteriorate from current levels.

Increased Liquidity Pressure: Shanshui's short-term borrowings increased to CNY11bn at end-1H15 from CNY4bn at end-2014 as a result of redemption of its USD378m (principal and interest) 2016 note and the poor operating environment. In comparison, Shanshui had cash and equivalents of CNY4bn at end-1H15. Short-term commercial paper (SCP) and medium-term notes (MTN) accounted for 51% of the company's short-term borrowings and 41% total borrowings. We believe the company had to rely on instruments with shorter maturities for funding because its access to bank financing remained curtailed by the unresolved shareholder disputes. The company says it intends to lengthen its debt maturity profile in 2H15.

Resolution of Disputes is Key: Shanshui's employee and shareholder disputes are still unresolved although Asia Cement Corporation (ACC), which owns 20.90% of Shanshui, and China National Building Materials (CNBM), which owns 16.67%, may make an offer to acquire the rest of the company subject to the satisfaction of certain pre-conditions. We believe the resolution of the disputes will bring the company's operations back to normal, which help it to reduce leverage.

KEY ASSUMPTIONS

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

- Average selling prices of cement in Shanshui's main markets to be weak in 2015 and 2016;
- Total capex (including acquisitions) between 2015-2017 no higher than CNY4bn;
- The company is able to roll over short-term debt

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

- Further weakening of liquidity.

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

- Resolution of employee and shareholder disputes, which will allow the company to access longer-term financing, may result in the Outlook being revised to Stable.
- Material improvement in the operating environment and liquidity may result in a rating upgrade, potentially by more than a notch.