20131015-巴黎银行证券-CHINA_CEMENT_State_Council_announcement_19页_561kb

Summary of State Council Announcement on Cement Sector Overcapacity

Core Content

The State Council has announced detailed policies to address overcapacity in China's cement sector. These measures aim to improve market efficiency, reduce environmental impact, and support the long-term development of the industry. The focus is on local government responsibility, backward capacity elimination, tighter emission controls, and changes in tax rebate policies to encourage the use of high-grade cement.

Main Policies and Key Points

• Local Government Responsibility: Local governments are now tasked with leading the capacity control efforts. They must ensure that new capacity expansions are approved with consensus from NDRC, MIIT, and the environment department, otherwise, construction will be halted and financial support denied.

• Backward Capacity Elimination: The State Council aims to eliminate 100 million tons (5-8% of total capacity) of clinker and grinding capacity by 2015. This includes the implementation of "replacement with equal capacity" or "replacement with reduced capacity" policies. The goal is to remove inefficient and outdated production lines, especially those with a capacity below 2500t/d.

• Tighter Emission Control: New emission standards will be introduced for the cement industry, with stricter controls in sensitive regions such as Beijing-Tianjin-Hebei, Changjiang Delta, and Zhujiang Delta. Non-compliance may result in higher electricity and water prices. It is expected that these new standards will be announced in October–November 2013.

• Tax Rebate Policy Change: The policy will encourage the use of high-grade cement (PO 42.5) by providing tax benefits, while reducing the VAT rebate for low-grade cement (PC 32.5). This is expected to increase the competitive advantage of large cement producers.

Key Implications for the Cement Sector

• Market Share Increase: Companies with advanced technology and efficient operations will benefit from the elimination of backward capacity, leading to increased market share.

• Pricing Power: With limited new capacity growth, the pricing power of major players is expected to strengthen, leading to improved profitability.

• Profit Margin Improvement: Changes in tax rebate policies may lead to increased profit margins for large cement producers, especially those that produce high-grade cement.

• Clinker Utilisation: Improved clinker utilisation rates are expected as backward capacity is removed, and more efficient production methods are adopted.

BNPP Recommendations

Anhui Conch: BNPP's Top Pick

Anhui Conch is highlighted as the top pick due to the following reasons:

1. Lowest Cost Producer: Efficient operations and cost management.
2. Improving Demand and Supply Outlook: Strong regional demand in East China.
3. Advanced De-NOx Technology: Leading in pollution control and compliance.
4. Low Proportion of Small Clinker Lines: Better capacity structure and efficiency.
5. Benefit from Tighter Emission Control: Advantage in sensitive regions.
6. High Proportion of High-Grade Cement Sales: Expected to benefit from the new tax rebate policy.

Detailed Guidance from the State Council

• Policy and Administration: Revise industry standards, strengthen market entry control, and publish regular lists of backward capacity for elimination.
• Environmental Protection: Introduce new emission standards, especially in sensitive regions, and enforce compliance with penalties for violations.
• Land Use: Conduct thorough checks on land use for overcapacity sectors and deny land approval for illegal construction.
• Financing: Implement differentiated financing policies, prohibiting support for unapproved projects and encouraging M&A.
• Pricing: Introduce differential electricity and water pricing for the cement sector.
• Tax: Expand fiscal support for backward capacity elimination and revise tax policies to encourage high-grade cement and waste treatment.
• Employee Placement: Local governments should manage employee transitions during capacity elimination.
• Information Transparency: Establish a public database for regulatory oversight.
• Supervision: Include overcapacity resolution in local government KPIs, with accountability for non-compliance.

Financial Outlook for Anhui Conch Cement

• Profit and Loss: Expected to see increasing revenue and profit margins over the next few years, with a focus on high-grade cement.
• Cash Flow: Recurring cash flow is projected to improve, with free cash flow to equity increasing significantly by 2015.
• Balance Sheet: Strong financial position with improving liquidity ratios and decreasing net debt.
• Valuation Metrics: The company is undervalued based on EV/EBITDA and P/E ratios, with a positive outlook for future performance.

Summary of High and Low Grade Cement

Conclusion

The State Council's announcement signals a serious effort to address overcapacity and environmental issues in the cement sector. These policies are expected to benefit large, efficient producers, with Anhui Conch leading the way due to its competitive advantages in cost, technology, and market position. Investors are encouraged to monitor the implementation of these policies and the resulting impact on market dynamics and profitability.