20180828-中国银河国际证券-中国建材-03323.HK-1H18_net_profit_affected_by_fair_value_loss_gearing_ratio_fell_significantly_8页_1mb

China National Building Material (3323.HK) Summary

Core Content

China National Building Material (CNBM) reported its first post-merger results in 1H18, showing strong performance in its core cement business despite a decline in sales volume. The company's net profit increased by 160% year-over-year (YoY) to RMB3.8bn, with recurring net profit growing by 224% YoY to RMB10.28bn, excluding a fair value loss of RMB1.2bn from financial assets. This loss was related to strategic holdings in other cement stocks, such as Jiangxi Wannianqing Cement (000789.CH).

The company's net debt/equity ratio improved significantly, dropping from 196% at end-2017 to 148% at end-1H18, and is expected to fall further to 123% by end-2018. This improvement in leverage is a key factor in the re-rating of the company's stock.

CNBM's outlook for 2H18 is upbeat, with cement and clinker ASP rising to RMB320 in July 2018, suggesting further potential for profit growth during the peak season.

Key Financial Highlights

• Recurring Net Profit: RMB3,422m in 1H17 to RMB10.28bn in 2018E, showing a 224% YoY growth.
• Net Margin: Improved from 2.4% in 2015 to 8.3% in 2018E.
• Recurring EPS: RMB0.11 in 1H17 to RMB1.22 in 2018E, a 268% increase.
• Valuation Metrics:
  • PER: 58.0 (2015) to 5.7 (2018E).
  • PBR: 0.85 (2015) to 0.77 (2018E).
  • EV/EBITDA: 14.4 (2015) to 6.5 (2018E).

Business Performance

Cement Business

• Revenue: RMB95.2bn in 1H18, up 22.0% YoY.
• Gross Profit: RMB28.5bn, up 49.1% YoY.
• Cement Sales Volume: 161m tonnes, down 5.6% YoY.
• Cement ASP: RMB311/tonne in 1H18, up 28.5% YoY.
• Cement Gross Profit per Tonne: RMB106 in 1H18, up sharply from RMB61 in 1H17.

Non-Cement Businesses

• New Materials Business (e.g., gypsum boards, glass fiber): Net profit rose 37.5% to RMB1.09bn.
• Engineering Services: Net profit increased 10.7% to RMB514m.

Key Operating Statistics

Earnings Quality Improvement

• Other Income/EBIT Ratio: Fell from 14.7% in 1H17 to 8.5% in 1H18.
• Core Business Contribution: The rapid growth of the cement business helped reduce reliance on government subsidies, improving earnings quality.

Outlook and Investment Recommendation

• Upbeat 2H18 Outlook: ASP for cement and clinker is expected to rise further, contributing to better performance.
• Re-rating Drivers: Improved net debt/equity, better earnings quality, and strong performance in core business.
• Target Price: Raised from HK$12.00 to HK$12.45, based on 1.2x 2018E PBR.
• Investment Rating: Reiterated as BUY, indicating a potential share price increase of >20% within 12 months.

Analysts

• Wong Chi Man – Head of Research
  • Contact: (852)3698-6317
  • Email: cmwong@chinastock.com.hk
• Mark Lau – Research Analyst
  • Contact: (852)3698-6393
  • Email: marklau@chinastock.com.hk

Disclaimer

This report is for institutional clients only and is not intended for distribution to individuals in jurisdictions where it would be illegal. The views expressed are those of the analysts and may not reflect the views of China Galaxy International Financial Holdings Limited or its subsidiaries. No warranty or guarantee is made regarding the accuracy or completeness of the information provided.

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