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DBS Group Research: Cement Sector Summary (16 June 2014)

Core Content

The DBS Group Research report from 16 June 2014 provides an analysis of the Chinese cement sector, focusing on 1H14 performance, 2H14 outlook, and valuation insights for key listed cement companies. The report highlights the weakening cement prices in 2Q14, which were partially offset by strong performance in 1Q14. It also outlines the impact of slowing property demand and the potential for improved performance in the second half of the year due to expected pro-growth policies.

The report identifies Anhui Conch and CR Cement as profit leaders, with Anhui Conch being the top pick and CNBM being downgraded to "Fully Valued" from "Hold" due to concerns over working capital and potential asset write-downs. It also provides a detailed analysis of the earnings and valuation sensitivity of various cement companies to changes in unit gross profit (GP).

Main Points

• Cement Price Trends:

  • Cement prices declined in 1Q14 by 1% q-o-q, with the South showing a stronger performance (+4.5%).
  • In 2Q14, cement prices fell by 2% q-o-q, with the East and South experiencing significant declines (-6% and -4%, respectively).
  • The report anticipates further price declines in 3Q14 due to seasonality and weaker demand, but a rebound in 4Q14 is expected as a result of restocking and pro-growth policies.

• Demand and Supply Outlook:

  • Cement demand growth for FY14 edged down to 5.7% from 6.0%, reflecting weaker property demand.
  • Infrastructure and urbanisation construction are expected to offset property weakness, with a projected 8% increase in cement consumption for infrastructure.
  • The report notes that the 2014 cement output is forecasted to grow by 4.2% in 1H14 and 6.9% in 2H14, driven by potential policy support.

• Valuation and Earnings:

  • Anhui Conch (914 HK) is recommended as a "Buy" with a target price of HK$33.70 (23% upside).
  • CR Cement (1313 HK) is also a "Buy" with a target price of HK$7.00 (44% upside).
  • CNBM (3323 HK) is downgraded to "Fully Valued" due to working capital and long-term (L-T) risks.
  • China Shanshui (691 HK) and West China Cement (2233 HK) are rated "Hold" with negative upside potential.

• Earnings Sensitivity:

  • The report provides a detailed table of earnings growth and sensitivity to changes in selling prices, sales volume, and cost of goods sold (COGS) for various cement companies.
  • Anhui Conch shows strong earnings growth with a 21% forecast for FY14F, while CNBM and Shanshui face downward revisions.

• Regional Price Analysis:

  • The report includes a detailed map of regional cement prices and a table showing quarterly and semi-annual price forecasts.
  • Regional price trends vary, with the South and East experiencing significant declines in 2Q14, while the South is projected to see a rebound in 4Q14.

Key Information

• HSI: 23,319
• Analyst: Addison DAI +852 2971 1931, addison_dai@hk.dbsvickers.com
• Earnings Forecast Revisions:
  • Earnings for all cement stocks in the report have been revised downward, reflecting more conservative price forecasts.
• Cement Demand:
  • Property demand growth is expected to stagnate in 2014.
  • Infrastructure demand is projected to grow by 8%, contributing to overall demand growth.
• Policy Impact:
  • The report suggests that Beijing is likely to implement more pro-growth policies in 2H14 to support economic activity, which should benefit the cement sector.
• Price Discipline:
  • Price discipline is expected to face challenges in 3Q14 due to weak seasonality and falling demand.
  • The report anticipates a 5% q-o-q decline in national cement prices in 3Q14, with a 5.5% rebound in 4Q14.

Summary Table

Conclusion

The report highlights a mixed performance in the first half of 2014, with weaker cement prices in 2Q14 offsetting the strong 1Q14 results. Anhui Conch and CR Cement are identified as top picks due to their strong earnings potential and favorable valuations. The report emphasizes the importance of infrastructure and urbanisation construction in offsetting property demand weakness, with a positive outlook for 2H14 due to potential policy support. Overall, the report suggests a cautious approach to the cement sector, with a focus on companies that can benefit from the expected rebound in prices and demand.