The affirmation of the ratings reflects the strength of the irrevocable unconditional guarantees provided by a consortium of banks based upon the weak link approach. The affirmation of the non-guaranteed Tranche V reflects the issuer’s stand-alone rating, recognising Perak-Hanjoong Simen Sdn Bhd’s (PHS) vulnerability to industry and economic cycles. Positive rating factors include PHS’ position as one of the larger integrated cement producers in the domestic cement industry and the revival of infrastructure projects that were shelved during the economic crisis period.

Backed by Gopeng Berhad, a major shareholder, PHS is the second largest integrated cement producer in the country with a market share of 16%, behind Lafarge Malayan Cement Berhad, based upon cement and clinker production capacity of 3.4 million tonnes (m.t.) and 3.0 m.t. per annum respectively. Operating out of two plants located in Padang Rengas, Perak, PHS managed to record a 28.9% growth in revenue to RM242.2 million in FY2002, despite the difficult operating environment then. A disproportionate increase in operating cost and higher depreciation charges, however, shaved operating profit margin to 1.5% compared to 9.1% previously.

With growth of the cement industry dependent on the level of construction activities, the year 2003 should see increased demand for cement reflecting the growth in the construction sector. While the demand would be comfortably met by the industry’s installed capacity, cement prices would still be subject to downward pressure from the overcapacity situation.

PHS’ thin operating profit margin was not sufficient to cover the RM15.7 million increase in financing costs, arising from the issuance of the ABBA bonds, with the company slipping into a larger than expected loss position in FY2002. The recent fiscal year will also see the company recording its second consecutive year of loss with its operations not being able to support the debt burden.

Total debt amounted to RM845.4 million at the end of FY2002 (FY2001: RM797.0 million), represented mainly by the ABBA bonds. Despite the increase in total borrowings, PHS’ debt leverage was maintained at 1.7 times with the increase in shareholders’ funds via the issuance of 28.0 million ordinary shares amounting to RM39.2 million in FY2002. PHS’ debt leverage is expected to improve with the progressive reduction of the ABBA bonds over the period of the facility