20131105-DBS_Group-China_Resources_Cement_16页_479kb

China Resources Cement Summary

Core Content

China Resources Cement (CRC) is the largest cement producer in Southern China, with significant business exposure in Guangdong (35%), Guangxi (36%), Fujian (14%), and Hainan/Shanxi/Yunnan (16% aggregate). The company has a cement production capacity of 74 million tonnes per annum (mt.p.a.) as of end-1H13. The report highlights CRC's strong fundamentals, improved supply/demand dynamics, and potential for growth in FY14 and FY15.

Main Points

• Earnings Forecast and Valuation:

  • The report maintains a BUY rating with a price target of HK$6.70, up from the previous HK$6.40.
  • CRC's FY13F and FY14F earnings are forecasted to be 7% and 5% higher, respectively, due to improved average selling prices (ASP) and lower production costs.
  • The target valuation is based on a 12x FY14F PE, above the company's historical average of 11.5x, justified by CRC's pricing power and market share expansion strategy.

• Supply/Demand Dynamics:

  • Southern China, particularly Guangxi, is expected to see improved supply/demand dynamics in FY14/FY15 due to limited new supply and robust demand growth.
  • Guangxi's cement demand is projected to grow at 10% annually, driven by urbanization, with a projected 20-25% FAI (Finished Annual Output) growth.
  • Guangxi's urbanization rate is 9ppts below the national average, and is expected to increase by 2ppts annually, contributing to higher cement consumption.

• Cement Price Recovery:

  • Cement prices in Guangxi and Nanning have experienced a "U" shape recovery, with prices rebounding above the peak of 4Q12.
  • In October 2013, cement prices in Guangxi and Nanning were Rmb5/t and Rmb20/t higher than the peak in 4Q12, respectively.

• Concrete Operations:

  • CRC has a significant presence in Nanning, with a total concrete capacity of 1.7 million cubic meters (Mn m³) from four plants.
  • The company is planning to expand its concrete capacity by constructing a new station in the western part of Nanning in 2014.
  • CRC's concrete sales volume in Nanning increased by 31% y-o-y in 1H13 and 26% in the first nine months.
  • CRC's concrete ASP is HK$285/m³, with a gross profit margin of 33%, and the company manages its receivables effectively, targeting a reduction from HK$100mn to HK$75mn by end-2013.

• Infrastructure Projects:

  • Guangxi is investing heavily in infrastructure, including the Nanning Metroline #1 and #2, new districts like Wuxiang, and railway projects.
  • These projects are expected to drive cement consumption and support the company's growth.

• Market Position and Strategy:

  • CRC holds a 14% market share in Nanning's concrete output, behind Shengda's 20%.
  • The company prioritizes turnover management over market share, given the industry's challenges with receivables.
  • CRC has diversified its clinker business across 9 areas in Guangxi and benefits from lower production costs due to direct power supply from China Resources.

Key Information

• Financial Highlights (FY Dec):

  • Turnover is expected to grow from HK$25,345m in 2012A to HK$31,980m in 2015F.
  • Pre-tax profit is projected to increase from HK$2,873m in 2013 to HK$5,183m in 2015F.
  • Net profit is forecasted to rise from HK$2,324m in 2012A to HK$3,955m in 2015F.
  • EPS is expected to increase from HK$0.36 in 2012A to HK$0.61 in 2015F.
  • The company's P/Book Value (P/BV) is projected to decrease from 1.6 in 2012A to 1.1 in 2015F.
  • Net debt/equity is expected to decrease from 0.8 in 2012A to 0.5 in 2015F.
  • ROAE is forecasted to increase from 11.4% in 2012A to 13.6% in 2015F.

• Key Projects in Nanning:

  • Nanning Metroline #1: Estimated investment of Rmb19.8bn, expected to consume cement from 2012 to 2016.
  • Nanning Metroline #2: Estimated investment of Rmb12.6bn, expected to start in 2013 or early 2014.
  • Nanning Airport New Terminal: Estimated investment of Rmb8bn, construction from Oct-11 to Oct-14.
  • Wuxiang New District: Expected to contribute significantly to cement demand, with infrastructure and social housing projects.

• Competitive Landscape:

  • The centralization ratio of leading cement producers in Guangxi is 65%, with CR Cement, Anhui Conch, and TCCI accounting for 65% of total cement output.
  • The CR5 ratio is 80%, indicating a consolidated market.
  • CRC's clinker capacity is 25mt, and its clinker utilization rate is around 115%, indicating strong operational efficiency.

• Peer Comparison:

  • CRC is compared with other HK-listed and A-share-listed cement companies.
  • CRC's price target is HK$6.70, with a PE of 11.8 in 2013 and 9.4 in 2014.
  • CRC's P/BV is 1.4 in 2013 and 1.3 in 2014, showing a slight decline in valuation relative to book value.
  • The report also includes a table comparing CRC with peers on various financial metrics.

Summary Table

Conclusion

CRC is well-positioned for growth in the Southern China cement market, with a strong focus on improving supply/demand dynamics and leveraging its market share and operational efficiency. The report highlights the company's potential for higher earnings and improved valuation, supported by robust infrastructure projects and a strategic approach to turnover management. The updated price target and continued BUY rating reflect the positive outlook for CRC's performance in the coming years.