20140221-DBS_Group-Set_for_a_firmer_2014_31页_763kb

Summary of "Set for a firmer 2014" Document

Core Content

The document provides an analysis of the Chinese cement industry's performance and outlook for 2014, focusing on supply and demand dynamics, earnings forecasts, and valuation insights. It highlights that the supply/demand outlook for 2014 is more favorable compared to previous years, with cement demand expected to grow by 5.4% and new supply growth to ease to 4.7%. This is a significant improvement from the 17%, 11%, and 6% growth in FY11, FY12, and FY13 respectively.

Main Views

• Supply and Demand Outlook:

  • Improved in 2014, with a lower risk of supply shocks.
  • National clinker output capacity utilisation rate is projected to rise to 77% in FY14 from 75% in FY13.
  • Southern and Eastern China are identified as the most promising markets due to strong demand and mature supply control, while Southwestern and Northwestern China are least preferred due to new supply pressure and weak demand.

• Earnings Prospects:

  • Strong 1H14 earnings expectations for Southern and Eastern China players.
  • Cement prices in Southern and Eastern China are expected to recover and strengthen further in 2014, with an average price increase of 14% and 6.4% in 1H14.
  • CRC (CR Cement) and Anhui Conch are highlighted as top picks, with earnings growth projected to be 20% and 14% respectively for FY14.
  • Shanshui Cement is noted as a contrarian BUY due to potential earnings recovery in FY14.

• Valuation and Recommendations:

  • CRC is rated as a BUY with a target price of HK$8.30 and an upside of 46%.
  • Anhui Conch is rated as a BUY with a target price of HK$35.00 and an upside of 17%.
  • Shanshui Cement is also rated as a BUY with a target price of HK$4.10 and an upside of 47%.
  • CNBM and West China Cement are rated as HOLD due to lower upside potential.

Key Information

Earnings Forecast Revisions

• CNBM (3323 HK): FY14F net profit growth revised up to 14%, with a target price of HK$8.18 (upside of 7%).
• Shanshui Cement (691 HK): FY14F net profit growth of 22%, with a target price of HK$4.10 (upside of 47%).
• Anhui Conch (914 HK): FY14F net profit growth of 24%, with a target price of HK$35.00 (upside of 17%).
• CR Cement (1313 HK): FY14F net profit growth of 31%, with a target price of HK$8.30 (upside of 46%).
• West China Cement (2233 HK): FY14F net profit growth of 12%, with a target price of HK$1.00 (upside of 11%).

Valuation Metrics

• CRC (1313 HK): FY14F PE of 8.2x, with a target P/E of 12.0x.
• Anhui Conch (914 HK): FY14F PE of 10.5x, with a target P/E of 12.3x.
• Shanshui Cement (691 HK): FY14F PE of 4.6x, with a target P/E of 6.8x.
• CNBM (3323 HK): FY14F PE of 4.7x, with a target P/E of 5.0x.
• West China Cement (2233 HK): FY14F PE of 7.2x, with a target P/E of 8.0x.

Sensitivity Analysis

• Earnings growth is sensitive to changes in selling prices and sales volume.
• For example, a 1% increase in selling price can lead to a 1-5% increase in EPS, while a 1% increase in sales volume can lead to a 1-3% increase in EPS.
• The analysis also shows that COGS has a negative impact on earnings, with a 1% increase in COGS leading to a -1-4% decrease in EPS.

Cement Price Outlook

• 1H14: Southern and Eastern China are expected to see price strength, with an average increase of 14% and 6.4% respectively.
• 2H14: Projected price increases of 2.8% and 5.9% for Eastern and Southern China.
• Northern, Northeastern, Southwestern, and Northwestern China: Unexciting price outlook due to weak demand and high supply.

Supply Outlook

• Clinker capacity growth: Expected to be 4.7% in 2014 and 1.7% in 2015.
• New capacity additions: Around 80mt in 2014, with the majority coming from Southwest China (Guizhou) and Northwest China (Gansu, Qinghai).
• Supply pressure: Expected in Southwestern and Northwestern China due to new capacity additions.

Demand Outlook

• Cement demand growth: Expected to be 5.4% in 2014 and 5.4% in 2015, driven by improved infrastructure investment and real estate growth.
• Real Estate Investment: Rose 20% in 2013, with a 28% increase in GFA new starts in 2013.
• Infrastructure Investment: Railway investment increased 3.8% in Jan-Nov 2013, but started to contract in July 2013.

Conclusion

The document suggests a more optimistic outlook for the Chinese cement industry in 2014, with improved supply/demand dynamics and stronger earnings potential for Southern and Eastern China players. CRC and Anhui Conch are highlighted as top picks, while Shanshui Cement is recommended as a contrarian BUY. The report also emphasizes the importance of regional differences, with Southwestern and Northwestern China facing supply pressure and weaker demand. Valuation metrics indicate that CRC and Shanshui Cement are undervalued, providing entry opportunities.