20170103-中国银河国际证券-Sector_Report_2017_Cement_Sector_Outlook__Trading_Opportunities_in_1H17_Dividend_Potential_with_Anhui_Conch_and_CR_Cement_33页_1mb

China Cement Sector Summary

Core Content

This document provides an outlook for the China cement sector in 2017 and 2018, highlighting earnings growth, valuation trends, and investment opportunities. It emphasizes the importance of fixed asset investment (FAI) in driving cement demand and discusses the potential for companies to grow through mergers and acquisitions (M&A) and increased dividend payouts.

Main Points

• Earnings Outlook for 2017: The cement sector is expected to benefit from the price momentum seen in 2H16. The report predicts a recurring profit growth of 27%–125% for cement stocks under coverage in 1H17E, primarily due to the low base effect in 1H16 and the sustained cement price growth in 2H16. Most cement stocks had only a low single-digit return in 2016, which may present a good opportunity for accumulation.

• Cautious Outlook for 2H17: While 1H17 is expected to see strong earnings growth, the second half of 2017 may experience slower growth due to a potential slowdown in the property sector. However, infrastructure investment, especially through public-private partnership (PPP) projects, is expected to provide downside protection.

• Dividend Potential: Companies with strong balance sheets may have the opportunity to increase their dividend payout ratios. Anhui Conch and CR Cement are highlighted for their potential to raise dividend yields to over 4% and 4.5%, respectively.

• M&A Opportunities: With new clinker production line approvals unlikely in the near future, companies with solid financial positions, such as Anhui Conch, are expected to be more active in M&A to drive growth.

• FAI Growth and Cement Demand: The report notes that FAI growth is closely correlated with cement demand. Real FAI is projected to grow by 8.5% YoY in 2017, slightly down from 9% in 2016E, but still expected to offset property sector slowdowns.

• Regional Outlook: Cement production is expected to remain largely flat in 2017. However, some regions, such as Inner Mongolia, Xinjiang, and others, may face challenges due to weak investment and low utilization rates.

• Cost Management: Coal prices are expected to increase by 10% in 2017E, leading to a 3% increase in cost per tonne, which should be manageable through price hikes and cost control.

Key Information

• Stock Recommendations:

  • Anhui Conch is the top pick for 2017 due to its net cash balance sheet, M&A potential, and ability to increase dividend yield.
  • CR Cement is also recommended with potential for higher dividend yields in 2018E.
  • BBMG has an undemanding valuation but faces policy risks due to its heavy reliance on property-related business.
  • CNBM is the least preferred stock in the sector due to its limited growth potential and higher financial leverage.

• Valuation Table:

  • Anhui Conch: Target price HK$26.10 (Buy), PER 9.9x, PBR 1.21x.
  • CNBM: Hold, PER 8.6x, PBR 0.58x.
  • BBMG: Buy, PER 7.5x, PBR 0.58x.
  • CR Cement: Buy, PER 8.8x, PBR 0.67x.

• Earnings Growth:

  • Anhui Conch: 18% recurring EPS growth in 2017E.
  • CR Cement: 125% recurring EPS growth in 2017E.
  • BBMG: 12% recurring EPS growth in 2017E.
  • CNBM: 27% recurring EPS growth in 2017E.

• Dividend Yield:

  • Anhui Conch: Potential to increase to >4% if no major acquisitions.
  • CR Cement: Potential to increase to >4.5% in 2018E if production lines are completed.

• Production and Cost Trends:

  • Clinker production capacity addition is expected to be minimal in 2017E (30m tonnes).
  • Coal prices are expected to rise by 10%, increasing cost per tonne by about 3%.
  • Gross profit per tonne is projected to increase for all major players in 2017E.

Investment Highlights

• Anhui Conch is highlighted for its strong balance sheet and potential for M&A and higher dividends.
• The report suggests that the cement sector may see trading opportunities in 1H17 due to the positive earnings outlook.
• The report warns that the property sector may slow down in late Q2 2017, which could cap further price increases.

Summary of Figures

• Figure 1: Cement production growth and real FAI growth correlation.
• Figure 2: Expected flat cement production in 2017E.
• Figure 3: Property sales growth and area under construction correlation.
• Figure 4: FAI growth in property and infrastructure segments.
• Figure 5: FAI growth from public and private sectors.
• Figure 6: Real FAI growth and Party Congress timing.
• Figure 7: Clinker production capacity.
• Figure 8: Annual addition of clinker production capacity.
• Figure 9: Coal price trends.
• Figure 10: Relative performance of cement stocks in 2016.
• Figure 11: 1H17E recurring EPS growth.
• Figure 12: Peer valuations.
• Figure 13: Anhui Conch's financials and market position.

Conclusion

The China cement sector is expected to remain stable in 2017, with a favorable earnings outlook and potential for increased dividend yields. Anhui Conch is recommended as the top pick due to its strong financial position and M&A potential, while CR Cement is noted for its potential for higher dividends in 2018. Policy risks and regional challenges may affect some stocks, but overall, the sector is viewed positively for investment opportunities.