德银-中国-建材行业-中国建材行业实地考察结论-20180115-22页_1mb

CNBM 2018 Business and Earnings Summary

Core Content

CNBM (3323.HK) has undergone a significant business upgrade in early 2018, with the conclusion of a site visit that highlighted the company's strong performance across its key business segments. The report outlines the outlook for CNBM's earnings, restructuring plans, and market position, particularly in the context of its merger with Sinoma.

Key Business Segments

• Cement and Aggregates:

  • CNBM's cement business is expected to remain healthy in 2018, with stronger-than-expected pricing in Q4 2017.
  • GP/t for CNBM's cement business is projected to increase from RMB70/t in FY17 to RMB85/t in FY18.
  • The company's low-cost automated cement plant in Shandong achieved a record GP/t of RMB215/t, with ASP at RMB395/t and cost at RMB180/t in December 2017.
  • Aggregates are considered a high-margin business with a current ex-factory price of RMB60-80/t and production cost of RMB20/t. CNBM has plans to expand its aggregates business with new lines and joint ventures.

• Gypsum Board:

  • CNBM holds a dominant market share in China's gypsum board sector, with BNBM contributing significantly to its profits.
  • BNBM's net profit in 9M17 reached RMB1.56bn, accounting for 23.8% of CNBM's net profit.
  • The market is expected to grow by around 10% over the next two years, with sales volume increasing by 15% through M&A.
  • Gypsum board demand is more insulated from the property cycle due to a typical replacement cycle of 4-5 years.

• Fiberglass:

  • CNBM and Sinoma Taibo are leading players in the fiberglass market, with Sinoma Taibo having a 50% domestic market share.
  • The segment is growing rapidly, with global demand increasing at 5-6% annually and China's demand at 15-20%.
  • Sinoma Taibo's sales volume increased by 24% in 2017, and ASP is expected to rise by 8-10% in 2018.
  • Margins are expected to remain at a minimum of 35%.

• Lithium Separator:

  • The segment is currently oversupplied, but has promising growth prospects.
  • CNBM plans to expand capacity to 1.2bsqm and achieve a 30% domestic market share and RMB500mn profit before tax by 2020.
  • Despite a significant price drop in 2017, management is optimistic about the potential for product weight reduction and tapping into the private car battery market.

Restructuring and Integration

• The merger with Sinoma is expected to be completed before CNY (Chinese New Year).
• The next phase of restructuring will focus on integrating the remaining 6 A-share listed subsidiaries.
• CNBM aims to become a construction materials juggernaut, with at least five distinct construction-related businesses, including cement, fiberglass, and gypsum board.

Earnings Revisions and Valuation

• Earnings for FY17/18/19 have been revised upwards by 17%/21%/25%.
• The target price for CNBM has been upgraded to HKD9.69, based on a 0.9x FY18E PB and an implied 10.7x FY18E PER.
• Valuation metrics show CNBM as undervalued compared to peers, with a P/E of 11.1x and P/B of 0.7x for FY18E.
• The report highlights the potential upside of 22% for CNBM at its new target price.

Risks

• Risks include potential breakdowns in price discipline, slowdown in demand, and higher-than-expected coal prices.

Summary Table

Market Cap and Competitors

• CNBM's market cap is USD5.5bn, significantly lower than its peers such as Conch (H) and Conch (A).
• The report compares CNBM's performance with other construction materials companies, highlighting its potential for growth and value creation.

Conclusion

CNBM is positioned to benefit from the integration with Sinoma and the growth in its new materials segments. The company's earnings are expected to rise, and its target price reflects optimism about future performance. Despite some risks, the restructuring and expansion plans suggest a positive outlook for CNBM in 2018.