20140403-DBS_Group-Certainties_outpace_uncertainties_30页_563kb

Summary of Document Content

Core Content

This document provides an analysis of the performance and outlook for the cement, steel, and aluminium sectors in China, focusing on the 2013 financial results and the expectations for 2014 and 2015. It outlines the key trends, uncertainties, and investment recommendations.

Main Points

Cement Sector

• 2013 Performance: Three cement companies missed expectations, four were in line, and one exceeded expectations.
• Supply Rationalisation: The supply side has seen significant rationalisation, with limited new production lines and reduced capex. The government has not issued new capacity approvals since 2009.
• Demand Outlook: Cement demand is expected to grow at 5.4% in FY14 and 5.5% in FY15, driven by urbanisation and infrastructure projects.
• Product Upgrade: The abolishment of PC32.5 grade cement is expected to lead to a 11% reduction in total cement supply, with a shift to PO42.5 grade cement.
• Regional Analysis:
  • East and South: Positive supply and demand outlook due to limited new supply and improved coordination.
  • Northwest and Southwest: Expected to add more capacity, leading to M&A activity.
• Investment Recommendations:
  • Buy: CR Cement (1313 HK), Shanshui Cement (691 HK), Angang Steel (347 HK), China Hongqiao (1378 HK).
  • Hold: Anhui Conch Cement (914 HK), West China Cement (2233 HK), CNBM (3323 HK).

Steel Sector

• 2013 Performance: Steel margins improved due to lower production costs offsetting declining steel prices.
• Raw Material Prices: Iron ore and coking coal prices fell more than steel prices, providing margin improvement.
• Profitability: Leading steel companies are restructuring to optimise product mix and reduce costs.
• SOE Reform: Mixed ownership models are being adopted, with government-controlled companies likely to benefit more.
• Investment Recommendations:
  • Buy: Angang (347 HK), Magang (323 HK), China Hongqiao (1378 HK).

Aluminium Sector

• 2013 Performance: Aluminium prices declined, and many capacities are loss-making.
• Capacity Closure: Post-CNY, 1.3mt of capacity was closed, with expectations of 1.5mt to be closed in FY14.
• Industry Shakeout: Expected to accelerate in Q2-Q3 FY14, with 50-60% of capacities in losses.
• Upstream Integration: Companies are integrating upstream to secure raw materials and reduce costs.
• Investment Recommendations:
  • Buy: China Hongqiao (1378 HK).

Key Information

Certainties

• Cement:
  • Demand growth outpaces supply growth due to limited new licenses and tighter credit to non-large market participants.
  • Urbanisation and infrastructure projects are expected to drive demand.
  • Supply rationalisation is convincing, with new supply growth expected to slow to 4.7% in FY14 and 3.1% in FY15.
• Steel:
  • Iron ore and coking coal prices are weaker than steel prices, improving margins.
  • Leading steel companies are restructuring and differentiating products.
• Aluminium:
  • About 60-70% of output capacities are loss-making.
  • Capacity closures are expected to continue, with industry shakeout accelerating in Q2-Q3 FY14.

Uncertainties

• Cement:
  • Tightening credit to property developers could affect demand.
  • Price collaboration may face challenges if demand collapses.
• Steel:
  • Steel prices lack re-rating catalysts.
  • No effective capacity shut-down may delay industry improvement.
• Aluminium:
  • Low aluminium prices may persist, discouraging new capacity additions.
  • Local government subsidies may slow down capacity closures.

Valuation and Recommendations

Outlook and Catalysts

• Cement:
  • Product upgrade (abolishment of PC32.5) is a long-term positive catalyst.
  • Continued urbanisation and infrastructure projects will support demand.
• Steel:
  • Lower raw material costs and restructuring efforts will improve profitability.
  • Continued focus on cost optimisation and product differentiation.
• Aluminium:
  • Industry shakeout and capacity closures will improve supply-demand balance.
  • Upstream integration efforts may provide long-term cost advantages.

Regional Capacity Forecasts

Conclusion

The document outlines a positive outlook for the Chinese material sector, with cement as the most preferred sub-sector due to supply rationalisation and urbanisation-driven demand. Steel is also showing improvement in margins due to falling raw material prices, while aluminium faces challenges due to low prices and excess capacity. Investment recommendations are made for several companies, with a focus on those expected to benefit from the ongoing restructuring and capacity rationalisation in the industry.