20140117-新鸿基金融集团-China_Cement__2014_Sector_Outlook_14页_1mb

China Cement: 2014 Sector Outlook Summary

Core Content

The China Cement sector outlook for 2014 highlights the impact of government policies, improving capacity utilization, and regional supply/demand dynamics on the industry's performance. Key points include:

• Government Policies: Stricter emission controls and capacity shutdowns have led to a rally in cement prices since 3Q13. The central government continues to push for emission reductions, and the phasing out of lower-grade cement is expected to be a major positive for the sector in 2014.

• Capacity Utilization: Sector capacity utilization has improved from ~70% in recent years to 77.9% in 2013. It is projected to increase further to 81.0% in 2014, driven by declining new supply and ongoing industry consolidation. This improvement is expected to enhance profitability.

• Demand Growth: Despite softening FAI growth, demand is expected to outpace supply growth in 2014, supported by infrastructure investment and signs of recovery in the property market. The government's social housing initiatives are also expected to support cement demand.

• Regional Dynamics: Eastern and South Central China are expected to benefit most from overcapacity easing due to their favorable supply/demand balance and higher utilization rates. Western China, however, continues to experience higher capacity growth and less favorable utilization rates.

Main Recommendations

• Anhui Conch (914.HK): Remains the top pick in the sector with a target price of HK$33.00. Key strengths include cost leadership, a strong presence in Eastern China, and a solid balance sheet. Management plans to expand through M&A in Western China, where the market is less consolidated.

• BBMG (2009.HK): Recommended as a Buy with a target price of HK$6.60. The company is the largest cement producer in the Beijing-Tianjin-Hebei region, which is expected to see accelerated capacity shutdowns in 2014. This should help cement prices bottom out and support BBMG's earnings growth through property and logistics operations.

Key Information

Supply and Demand Trends

• Total cement capacity growth in 2013 is expected to slow to 3.2% y/y, down from 6.2% in 2012.
• New NSP clinker capacity additions in 2013 are estimated at 122m tons, a 24.0% decrease from 2012.
• The phasing out of lower-grade cement (32.5 grade) is expected to increase demand for higher-grade cement (42.5 grade), easing clinker overcapacity.
• Cement production growth in 2013 is projected at 9.7% y/y, with further slowdown expected in 2014.

Emission Controls and Cost Impact

• New emission standards, effective from 1 March 2014 for new facilities and 1 July 2015 for existing ones, will increase operating costs, particularly for smaller producers.
• Companies with large-scale production lines (e.g., Anhui Conch and China Resources Cement) are expected to face less cost pressure and benefit from industry consolidation.
• The shift to higher-grade cement production is expected to improve both supply and demand dynamics.

Stock Performance and Valuations

• The cement stocks index shows mixed performance with some companies experiencing price declines.
• Anhui Conch is valued at 14X/13X of FY14E/FY15E EPS, implying an EV/EBITDA of 8X/7X.
• BBMG is valued at 6X/5X of FY14E/FY15E EPS, with a target price of HK$6.60.

Regional Outlook

• Eastern and South Central China: Show the most favorable supply/demand dynamics with higher utilization rates and potential for faster overcapacity easing.
• Western China: Continues to add new capacity and has weaker utilization rates, but may become a growth driver due to ongoing urbanization and M&A opportunities.
• Northern China: Experiences slower production growth and weaker price rebounds, indicating less favorable dynamics compared to other regions.

Key Risks

• Economic Slowdown: Further slowdown in China's economy could impact demand.
• Liquidity Tightening: Increased financial restrictions may affect the industry.
• Coal Price Increases: Could raise production costs.
• Stricter Property Market Regulations: May dampen real estate demand.
• Environmental Regulations: Could lead to further capacity reductions and cost increases.

Conclusion

The cement sector in China is expected to benefit from government policies aimed at reducing emissions and phasing out lower-grade cement, which should improve supply/demand dynamics and profitability. Eastern and South Central China are projected to see the most significant improvements, while Western China may become a growth driver through M&A and urbanization. Anhui Conch and BBMG are highlighted as top picks due to their strong market positions, cost leadership, and exposure to favorable regions. However, risks such as economic slowdown and stricter regulations remain.