20161003-中国银河国际证券-China_Cement_Weekly__Stronger_Price_Rise_before_the_National_Holidays__Industry_Profit_Growth_Turned_Positive_in_8M16_12页_920kb

China Cement Sector Summary

Core Content

The China cement sector experienced a notable increase in cement prices in late September 2016, with a nationwide average rise of 3.8% week-on-week to RMB283.42/tonne. This price increase was attributed to the recovery in market demand, with daily cement shipments reaching 80%-90% of the normal level in most areas. The average inventory level also increased slightly to 66.44% due to the rise in production. However, the price increases are expected to be fully implemented only after the national holidays.

Coal prices continued to rise, with the Bohai-Rim Steam Coal (Q5500K) index increasing by RMB7/tonne to RMB561/tonne, a 42% year-on-year (YoY) increase. The National Development and Reform Commission (NDRC) engaged with major coal producers to address the price surge, and further coal price increases in Q4 could lead to more aggressive cement price hikes.

Industry profit growth turned positive in the first eight months of 2016, with an 18% YoY increase in profit to RMB18.5bn. This marked the first YoY profit growth in 18 months. However, August profit was slightly lower than June, likely due to the impact of a typhoon that affected construction activity in eastern and southern regions. As construction activity resumes, price increases in these areas are expected to benefit companies such as CR Cement and Anhui Conch.

Key Financial Metrics

| Company | Ticker | Rating | Price (HK$) | Market Cap (US$m) | PER (x) - 2015 | PER (x) - 2016E | PER (x) - 2017E | EV/EBITDA (x) - 2015 | EV/EBITDA (x) - 2016E | EV/EBITDA (x) - 2017E | Net Debt/Equity (%) - 2015 | Net Debt/Equity (%) - 2016E |
|-----------------|----------------|--------|------------|------------------|----------------|----------------|----------------|---------------------|---------------------|---------------------|-----------------------|---------------------------|---------------------------|
| Anhui Conch | 914 HK Equity | BUY | 21.25 | 13,585 | 15.7 | 11.3 | 10.6 | 8.2 | 6.3 | 5.7 | 8.2 | 6.3 |
| ONBM | 3323 HK Equity | HOLD | 3.44 | 2,381 | 25.2 | 8.1 | 6.9 | 9.9 | 9.8 | 9.4 | 218 | - |
| BBMG | 2009 HK Equity | BUY | 2.98 | 6,263 | 14.4 | 9.1 | 8.5 | 0.71 | 0.68 | 0.65 | 9.6 | 8.1 |
| CR Cement | 1313 HK Equity | BUY | 3.10 | 2,596 | 9.7 | 13.7 | 10.6 | 0.75 | 0.73 | 0.69 | 8.5 | 7.3 |
| Simple Average | | | | | 16.2 | 10.5 | 9.2 | 0.82 | 0.77 | 0.72 | 9.0 | 7.9 |
| Weighted Average | | | | | 15.6 | 10.7 | 9.7 | 1.07 | 0.99 | 0.92 | 8.8 | 7.2 |

EPS Growth and Valuation

Regional Cement Price and Market Share

Regional Cement Price Trends

• East China: Prices rose significantly in Anhui and Jiangsu, with some areas seeing increases of RMB20-50/tonne.
• South Central China: Guangdong and Guangxi saw notable price increases, with Guangxi at 41.7% and Guangdong at 24.5%.
• North China: Prices increased in Hebei and Shanxi, with Hebei at 0.9% and Shanxi at 7.7%.
• Southwest China: Sichuan and Guizhou showed higher price increases, with Sichuan at 12.6% and Guizhou at 8.8%.

Market Share in Terms of Clinker Capacity (2015)

• East China: Anhui Conch had the largest market share with 53.0%, followed by CNBM at 26.5% in Jiangsu.
• South Central China: Guangdong had the largest share at 16.2%, with CNBM and Anhui Conch also having significant presence.
• North China: CNBM dominated with 35.4% in Shandong.
• Southwest China: Sichuan had the largest share at 4.4%, with CNBM and Anhui Conch also having notable shares.

Main Points

• Cement Price Increase: Prices rose by 3.8% week-on-week, with some regions seeing increases of RMB20-50/tonne.
• Market Demand Recovery: Daily shipments reached 80%-90% of normal levels in most areas by the end of September.
• Profit Growth: The industry saw its first YoY profit growth in 18 months, with an 18% increase in profit for the first eight months of 2016.
• Coal Price Impact: Continued coal price increases could lead to more aggressive cement price hikes.
• Typhoon Impact: Construction activity in the east and south was slowed by a typhoon, but recovery is expected to drive further price increases.
• Stock Performance: Cement stocks showed varied performance, with BBMG as the best performer and Anhui Conch as the weakest in the coverage.
• Valuation Trends: PER and EV/EBITDA ratios showed a downward trend for most companies, indicating potential undervaluation.

Key Companies

• Anhui Conch: Strong regional exposure in East and South Central China, with a BUY rating.
• CR Cement: Expected to benefit from price increases in East and South China, with a BUY rating.
• BBMG: Strong performance and BUY rating, with significant exposure to South Central China.
• CNBM: HOLD rating, with high EPS growth in 2016 but lower in 2017.

Conclusion

The China cement sector is showing signs of recovery, with stronger price increases and positive profit growth in the first half of 2016. The continued rise in coal prices and expected resumption of construction activity in the eastern and southern regions are positive factors for the industry. Companies with significant exposure to these regions, such as Anhui Conch and CR Cement, are likely to benefit from the anticipated price increases. Valuation metrics suggest that some companies may be undervalued, offering potential investment opportunities.