20180613-中国银河国际证券-海螺水泥-600585.SH-Temporary_Suspension_of_Tongling_Conch_Expected_To_Have_Limited_Impact_5页_945kb

Conch Cement [0914.HK; 600585.CH] Summary

Core Content

Conch Cement (00914.HK; 600585.CH) is a major player in the Chinese cement sector, with a temporary production suspension at its subsidiary, Tongling Conch, due to environmental protection regulations. The suspension has limited financial impact on the company, as it accounted for only 5.52% of Conch Cement's net profit in 2017, and the municipal government is expected to support the company in resolving the issue. The company maintains a BUY rating with a H-share target price of HK$59.50 (up 18.4%) and an A-share target price of RMB45.10 (up 20.7%).

Main Points

• Tongling Conch Suspension:

  • The suspension of Tongling Conch's pier, located within a Class B reserve, led to a temporary production halt.
  • This was due to a central government initiative to upgrade drinking water source reserves.
  • The company emphasized that the suspension was not due to any legal violations.
  • The impact on earnings is expected to be limited due to the small contribution of Tongling Conch to overall profits and the anticipated swift resolution with local authorities.

• Share Price Performance Factors:

  • Two factors previously limiting share price performance are fading:
    1. Conch Venture's Valuation: Conch Venture (0586.HK) was previously seen as a cheaper proxy for Conch Cement, but this is no longer the case as the market cap ratio has dropped from >110% to ~80%.
    2. Conch Cement-A Discount: The discount between Conch Cement-H and Conch Cement-A has narrowed from >17% to ~9%, closer to the 3-year average of 6.4%.

• Financial Highlights (2015–2019E):

  • Revenue: Showed a steady growth from RMB50,976 million in 2015 to RMB91,899 million in 2019E.
  • Net Profit: Increased from RMB4,714 million in 2015 to RMB9,159 million in 2019E.
  • Net Margin: Improved from 12% in 2015 to 21.6% in 2017.
  • Recurring EPS: Rose from RMB0.623 in 2015 to RMB1.724 in 2017, indicating strong earnings growth.
  • PBR (Price-to-Book Ratio): Declined from 3.14 in 2015 to 1.89 in 2019E, reflecting improved asset efficiency.
  • PER (Price-to-Earnings Ratio): Decreased from 36.2 in 2015 to 9.9 in 2019E, indicating a more attractive valuation.
  • EBITDA Margin: Improved from 28.1% in 2015 to 33.3% in 2019E, showing better cost control and operational efficiency.

• Key Financials:

  • Recurring Net Income: Grew significantly from RMB3,299 million in 2015 to RMB9,133 million in 2019E.
  • EPS Growth: Demonstrated consistent growth, with a notable increase in 2017 and 2018.
  • Cash Flow: Net operating cash flow increased from RMB8,943 million in 2015 to RMB26,797 million in 2019E, indicating strong liquidity.

• Balance Sheet:

  • Total Assets: Rose from RMB105,781 million in 2015 to RMB144,656 million in 2019E.
  • Shareholders' Equity: Increased from RMB70,147 million in 2015 to RMB117,429 million in 2019E.
  • Current Ratio: Improved from 1.3 in 2015 to 3.4 in 2019E, suggesting better short-term liquidity.
  • Quick Ratio: Increased from 0.9 in 2015 to 2.8 in 2019E, indicating improved ability to meet short-term obligations.

• Operational Metrics:

  • Cement and Clinker ASP (Average Selling Price): Increased from RMB204.5 in 2015 to RMB261.5 in 2017, showing rising prices.
  • Gross Profit per Tonne: Improved from RMB59 in 2015 to RMB97 in 2017, indicating better margins.
  • Inventory Levels: Generally stable, with some fluctuations in the east and south central regions of China, suggesting effective inventory management.

Key Figures

Conclusion

The temporary production halt at Tongling Conch is unlikely to have a significant impact on Conch Cement's earnings. The company is expected to recover quickly with government support, and its financial performance has shown consistent improvement. The two factors that previously limited its share price performance are diminishing, which supports the BUY rating and the target prices for both H and A shares. Conch Cement is in a strong financial position with improving margins, rising revenues, and solid cash flows, making it an attractive investment opportunity.