20180525-广发证券_香港_-China_Pulse_Check__Building_Materials_Sector__Demand_recovery_in_line_with_expectation,_watch_for_sector_opportunities_7页_700kb

China Pulse Check: Building Materials Sector Summary

Core Content

The Building Materials Sector in China is experiencing a demand recovery in line with expectations, with cement production rebounding in April and flat glass production showing improvement. The sector is characterized by divergence in performance between sub-sectors and regions, with southern China outperforming the north in cement production. The short-term shocks from the first quarter of 2018 (1Q18) have subsided, and the rebound in production is attributed to the fading of weather, CNY (Chinese New Year), and Two Sessions effects, rather than weak demand.

Main Points

1. Production Trends

• Cement Production (4M18): Declined by 1.9% YoY, but rebounded significantly in April, growing by 3.2% YoY and 36.5% MoM, surpassing the seasonal growth of 9.7% MoM in April 2017.
• Flat Glass Production (4M18): Declined by 1.5% YoY, but increased by 1.4% YoY in April and 3.3% MoM, better than the seasonal decline of -2.2% MoM in April 2017.
• Regional Performance: Southern cement production was stronger than in the north, reflecting better demand and supply control in the south.

2. Investment Trends

• National FAI Investment (4M18): Grew by 7.0% YoY, showing relative stability compared to previous periods.
• Infrastructure Investment (4M18): Grew by 12.4% YoY, but declined from the previous year by 10.9pp.
• Property Development Investment (4M18): Grew by 10.3% YoY, but declined from the previous year by 1.0pp.
• New Starts Floor Space (4M18): Grew by 7.3% YoY, indicating low housing stock and potential for new construction.
• Property Area Sold (4M18): Grew by 1.3% YoY, but declined from the previous year by 14.4pp, suggesting weak demand in the housing market.

3. Demand and Supply Analysis

• Cement: High-frequency data shows positive demand and supply conditions, with capacity storage ratio at 54%, indicating tight supply and potential for price growth.
• Flat Glass: Inventory levels remained low, but price trends were less promising, especially in the peak season.
• Industry Outlook: The cement sector is expected to see stable demand and limited supply constraints, leading to promising business conditions. The glass sector is under closer scrutiny due to supply changes.

4. Investment Recommendations

• Cement Companies: Favorable for rebound in earnings in the second quarter of 2018. Recommended companies include Conch Cement (600585 CH), Huaxin Cement (600801 CH), and Tapai Group (002233 CH).
• Glass Companies: Shandong Pharmaceutical Glass (600529 CH), Pacific Quartz (603688 CH), and China Jushi (600176 CH) are highlighted for rising high-end demand.
• Other Sub-sectors: Quartz glass demand from semiconductor companies and high-end glass coating materials are on the rise. Glass fiber production and sales remain promising, driven by economic recovery in Europe and the US.

5. Key Risks

• Economic downturn
• Macro policy volatility (e.g., currency and property policies)
• New capacity additions exceeding expectations
• Rapid increase in raw material costs
• Changes in energy consumption structure
• Company-specific operational and management risks

Key Data Points

Sector and Company Ratings

Sector Ratings

• Positive: Sector expected to outperform benchmark by more than 10%.
• Neutral: Expected relative performance between -10% and 10%.
• Cautious: Sector expected to underperform benchmark by more than 10%.

Company Ratings

• Buy: Stock expected to outperform benchmark by more than 15%.
• Accumulate: Stock expected to outperform benchmark by more than 5% but not more than 15%.
• Hold: Expected relative performance between -5% and 5%.
• Underperform: Stock expected to underperform benchmark by more than 5%.

Additional Information

• The GFS China Pulse Check provides monthly updates on various sectors, including steel, coal, property, auto, natural gas, and building materials.
• Building Materials Sector Update includes cement and glass output and prices, and downstream industry performance (property and infrastructure).

Conclusion

The Building Materials Sector is showing signs of recovery, with cement leading the rebound and flat glass improving but under closer watch. Demand divergence between infrastructure and property is notable, with property showing slightly better performance. The sustainability of fundamentals is emphasized as the key factor for investment opportunities. Companies with strong supply control, low-cost advantages, and rising high-end demand are highlighted for positive outlook.