Upbeat on 2H18 Earnings with Ample Demand Outlook

18 Pages·2017·1.82 MB·English

h
股 c
r
a
票 se
e
R
研 y
t
究 ui
q
E Sector Repo rt: Cement and Construction Materials Sector Sean Xiang 向宇豪
行业报告： 水 泥建材行业 (86755) 2397 6725
[email protected]
4 May 2018

More Up bea t on 2H18 Earnings with Ample Demand Outlook

基于充足的需求前景对下半年盈利更加乐观
行 rt
o
业 ep  High frequency data underpins historical high cement shipments. We
R
报 or have modeled weekly cement shipment volume for eastern and southern Rating: Outperform
t China, key observations include: 1) during 1Q18, cement shipment in Maintained
c
告 Se eastern China dropped approx. 9% and climbed 9.6% in southern China, with
the majority of the volume decline occurring in Mar. 2) the two regions' 评级： 跑赢大市 (维持)
cement shipments exceeded cement production since late Mar.; 3) during the
last three weeks, cement shipments from the two regions rose by approx. Weekly Cement Shipment Simulation in
17%/15% YoY. Yangtze Delta Region
长三角周度水泥发货模拟
 A cross sector check for the steel industry has come up with the same
observations. We saw that rebar shipments from mills and dealers have
2017 2015 2016 2018
also peaked, with both mills and social inventory having dropped rapidly. mt
16
 Ample downstream demand has conformed with industry channel 14
checks and construction contracting. While we have observed 12
证 ort homogeneous results feedback on extreme tightness in cement S-D from 10
p
券 h Re 1va) risoturosn cgh annenwe lcso inns Atrupcr.t,i osnu ccho nrotrbaucstst ddouwrinnsgt re1aQm1 8d; e2m) acnodn issi sitlleunstt rahtikeeds b iyn: 68
研 c growth of GFA under construction; 3) the highest construction backlog growth
究 ear since 2014 during 1Q18. 4
s 2
e
报 y R  Positive earnings brought by better-than-expected 2H18 demand, 0 W W W W W W W W W W W W W
告 uit maintain "Outperform". 2H18 is expected to be a historic moment for the 1 5 9 13 17 21 25 29 33 37 41 45 49
q cement industry, with players' profits breaking market imagination on top of 1)
E Source: Guotai Junan International.
historically high cement shipments, facilitated by robust 2H18 downstream

demand and backed by ample construction activities, 2) cement production
restrictions for administrative means, and 3) high barriers for new capacity. Weekly Cement Shipment Simulation in

Guangdong and Guangxi
 高频数据显示历史最高水泥发货量。我们测算了华东和华南的周度水泥发货量，得到的主 两广地区周度水泥发货模拟
or 要观点为：1)华东水泥发货在2018年第一季度下滑9%，绝大多数下滑量来自三月。而华
ct 南在2018年一季度发货量同比升9.6%。2)自3月末两区域的水泥发货超过水泥生产。3) 2017 2015 2016 2018
Se 近三周华东及华南的水泥发货与去年同期相比上升约17%/15%。 8 mt
s
al  与钢铁行业的板块交叉对比得到相同的观测结论。我们观察到来自钢厂和钢贸商的螺纹钢 7
水泥 Materi 发货同样正在探顶，并且钢厂和社会库存迅速回落。 56
n  充裕的下游需求从渠道调查得以确认，并且也从建筑施工得到印证。在我们从各个渠道获 4
建 tio 得水泥供需在4月极度趋紧的一致反馈的同时，如此旺盛的下游需求从以下方面得到解释： 3
材 uc 1)2018 年第一季度强劲的新签合同;2)持续攀升的在建面积增速;3)2018 年第一季度的在
r 2
行 st 手建筑订单额增速为自2014年后最高水平。
n 1
业 o
C  超预期的2018下半年需求将带来行业盈利盛宴，维持“跑赢大市”。2018下半年将成为 0
nd 水泥行业的历史时刻，行业公司的盈利将超出市场的想象空间，基于：1)基于充裕的建筑 W1 W5 W9 W13 W17 W21 W25 W29 W33 W37 W41 W45 W49
t a 施工活动，2018下半年强劲的下游需求所形成的历史最高发货；2)由于行政措施所带来的
en 水泥生产限制；3)高度的新产能门槛。 Source: Guotai Junan International.
m
e
C
Company Name Code Price Rating 18PER 19PER 20PER 18ROE 18P/B 18Yield
公司名称 编号 股价(HK$) 投资评级 市盈率(x) 市盈率(x) 市盈率(x) 净资产收益(%) 市净率(x) 股息率(%)
Anhui Conch 00914 HK 47.250 Accumulate 7.8 6.9 6.4 26.4 1.9 5.4
CRC 01313 HK 7.950 Buy 6.7 6.4 6.1 23.1 1.4 7.9
CNBM 03323 HK 8.820 Buy 5.6 5.2 4.9 14.3 0.8 5.4
Weighted Average.
7.2 6.5 6.1 23.9 1.6 5.8
市值加权平均
Source: the Companies, Bloomberg, Guotai Junan International.

See the last page for disclaimer Page 1 of 18
P Cement and C onstruction Materials Sector

HOW STRONG IS THE CURRENT DOWNSTREAM DEMAND?

While the market has fully realized the benefits from cement industry discipline as well as supply cuts from both off-season
production halts as well as production suspension due to environmental supervision, we believe that fears against downstream
demand uncertainty in 2H18 have returned as a main concern to drive market sentiment starting from May. In our view, the 18
0
2
market may overemphasize the growth decline of downstream demand but may underestimate the power of the enormous y
a
M
absolute quantity of demand while overall cement supply is declining. In the following section, our upbeat view on a 4
consistent robust downstream demand outlook will be illustrated based on observations from: 1) cement shipments

in eastern and southern China, 2) cross-checks with steel shipments and inventory, 3) feedback from downstream
channel checks from various sources, and 4) key indicators from construction contractors.

 Recently, both eastern and southern areas of China experienced approx. 15% YoY higher cement shipment.

Despite lower-than-expected cement shipment volume being reported in 1Q2018, we have observed very strong cement

shipments starting from the last week of Mar. While we believe that production volume data issued by the National Bureau
of Statistics of China (NBSC) is no longer indicative of downstream demand due to adjustments of the caliber of statistics,
as well as distortion from production suspension, we have mapped cement shipment volume based on cement inventory
ratio and grinding capacity utilization rate. This estimation tells us that: 1) cement shipments during 1Q18 dropped by
approx. 9% in eastern China during 1Q18, with the majority of volume drop occurring in Mar., while cement shipment in
southern China climbed approx. 9.6% YoY during 1Q18; 2) cement shipment volume rebounded substantially entering the
last week of Mar., with cement shipments exceeding cement production in eastern China since then; and 3) current
cement shipment volume (the last 3 weeks in Apr.) was approx. 17%/15% higher than the cement shipment volume during
the corresponding period in 2017, from both eastern and southern China, which should justify very robust downstream
demand from both eastern China and southern China regions.
材
Figure- 1: Weekly Cement Shipment Volume in Eastern Figure- 2: Weekly Cement Shipment Volume in Southern 建
泥
China (Yangtze Delta Region) China 水
or
2017 2015 2016 2018 2017 2015 2016 2018 ct
e
16 mt 8 mt s S
al
14 7 ateri
M
12 6 n
o
10 5 ucti
str
8 4 on
C
6 3 nd
a
4 2 ment
2 1 Ce
0 W W W W W W W W W W W W W 0 W W W W W W W W W W W W W
1 5 9 13 17 21 25 29 33 37 41 45 49 1 5 9 13 17 21 25 29 33 37 41 45 49

Source: Guotai Junan International. Source: Guotai Junan International.

Figure- 3: Cement Inventory Ratio and Grinding Capacity Figure- 4: Cement Inventory Ratio and Grinding Capacity
Utilization Rate in Eastern China (Yangtze Delta Region) Utilization Rate in Southern China
Cement grinding capacity utilization in eastern China Cement grinding capacity utilization in southern China
Cement inventory ratio in eastern China (RHS) Cement inventory ratio in southern China (RHS)
90% 85% 90% 85%
80% 80% 80% 80%
70% 75% 70% 75%
70% 70%
60% 60%
65% 65%
50% 50%
60% 60%
40% 40%
55% 55%
30% 30%
50% 50%
20% 45% 20% 45% ort
p
10% 40% 10% 40% e
R
0%Jan-15 May-15 Sep-15 Jan-16 -16May Sep-16 Jan-17 May-17 Sep-17 Jan-18 35% 0%Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 35% Sector
Source: Digital Cement, Guotai Junan International. Source: Digital Cement, Guotai Junan International.

See the last page for disclaimer Page 2 of 18
P Cement and C onstruction Materials Sector

Table- 1: Cement Demand Indicators for Eastern and Southern China
Average inventory ratio Average grinding utilization Simulated Cement Shipment (mt)
Eastern China Southern China Eastern China Southern China Eastern China Southern China
1Q2017 54% 54% 60% 63% 107.7 61.2
1Q2018 56% 48% 63% 75% 98.0 67.0 8
1
Apr. 12 to Apr. 26 in 2017 56% 53% 78% 74% 35.1 18.8 20
y
Apr. 12 to Apr. 26 in 2018 47% 45% 83% 85% 39.4 21.7 Ma
Source: Guotai Junan International. 4

 Strong demand was also underpinned by cross-checks with the steel sector. As rebar demand has the same
downstream exposure to cement, we also evaluate social rebar demand for a more comprehensive downstream check, as

we believe that the magnitude of rebar social inventory stack up/digestion of rebar provides a more precise view on
downstream construction activities. Key observations from this cross-check includes: 1) Social rebar inventory and rebar

inventory from key mills declined rapidly since mid-Mar., while daily output volume was consistently boosting. 2) Rebar

downstream demand was delayed by nearly one month, which aligns with the trend from weekly cement shipment in Mar.
2018. 3) Currently, rebar demand exceeds demand from the corresponding period in 2017, being similar to observations
from cement shipments. Our simulated rebar demand indicates that rebar shipments during the four weeks in Apr. was
approx. 15% higher YoY, while demand during the first four weeks in Mar. 2018 was approx. 30% lower compared to the
corresponding period in 2017.

Figure- 5: Social Rebar Inventory Figure- 6: Rebar Inventory and Daily Production from Key
Mills
2013 2014 2015 Rebar inventory from key mills
10kt 10kt Daily rebar production from key mills (RHS)
2016 2017 2018
1,200.00
1,100.00 500 50 材
450 48 建
1,000.00 泥
400 46 水
900.00 350 44 or
ct
800.00 300 42 Se
s
700.00 250 40 al
600.00 200 38 ateri
M
500.00 150 36 on
100 34 cti
400.00 u
50 32 str
300.00 0 30 on
200.0001/0102/0503/1204/1605/2106/2507/3009/0310/1511/1912/24 -15Apr Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 nt and C
Source: Mysteel, Guotai Junan International. Source: Mysteel, Guotai Junan International. me
e
C
Figure- 7: Simulated Rebar Procurement from End Users Figure- 8: Mysteel Rebar Shipment Volume to End Users
Based on 235 Sample Steel Dealers
10kt 2017 2016 2018 kt 2017 2016 2018
600.00 250
500.00
200
400.00
150
300.00
100
200.00
50
100.00
0.00 0
01/0102/0503/1204/1605/2106/2507/3009/0310/1511/1912/24 J F M A M J J A S O N D port
Source: Mysteel, Guotai Junan International. Source: Mysteel, Guotai Junan International. e
R
or
ect
S

See the last page for disclaimer Page 3 of 18
P Cement and C onstruction Materials Sector

 Channel checks with cement suppliers in eastern and southern China. Based on channel checks with industry
sources and the general consensus within cement companies, we have learnt that most have raised expectations
regarding the cement market to a more upbeat one recently, jointly contributed by better-than-expected downstream
demand status entering late Mar., as well as the successful implementation of industry discipline during the slow season 8
1
0
in 1Q18, which helps to maintain inventory at a relatively low level. They also expect that the low inventory could be 2
y
a
retained even during the slow season in 3Q18, due to expectations of a stable demand condition and effective M
4
implementation of off-season production halts during the period.

 Downstream demand may consistently remain strong during Apr. to Nov. due to the enormous backlog amount

from construction projects transferred from 2017, as well as expectations of 4Q construction layoffs. With the
cross-checks from cement and steel demand, as well as our channel checks with industry personnel jointly presenting

much stronger Apr. demand compared to the corresponding period in 2017, we view such robust demand momentum to
continue to be enlarged in 2H2018. With reference from recently issued construction contracting data, we have observed
a continuous rise in GFA under construction from contractors, with YoY growth being the highest since mid-2015, which
could be a result jointly of continuing expanding newly signed contracts during 1Q2018 and the accumulation of an
enormous amount of uncompleted contracts being transferred from last year during the period, While these indicators
offer a snapshot on the overall domestic absolute workload of construction projects that remain to be constructed, given
the expectations of construction work layoffs for air quality control during the heating season in 4Q18, we believe that
construction work might be clustered during Apr. to Nov., making downstream demand consistently stay strong during
such period, if weather conditions stay normal. Therefore, we believe that downstream demand may surprise the market,
entering the slow season in June, being a key pillar to support lower-than-expected cement price retracement during the
period. Among all regions, southern China is expected to deliver the strongest demand potential given the highest YoY
backlog growth from Guangdong and its decent new contract amount signed during 1Q2018. 材
建
泥
Figure- 9: Construction Contracts Indictors in China Figure- 10: New Contract Amount from Leading Domestic 水
Construction Contractors ctor
e
NNaattiioonnaall nGeFwAly u snidgenre cdo cnosntrsutcruticotnio fnro cmon ctorancsttsr uYcotiYon % contracts YoY % 22001136 22001147 22001158 als S
National new GFA from construction contracts YoY % RMBbn 2017 YoY % 2018 YoY % eri
Contract amount not completed and transferred from last year YoY % at
M
30% 12,000 35% n
o
2205%% 10,000 29.6% 26.2% 30% structi
15% 23.6% 23.8% 25% on
10% 8,000 d C
5% 6,000 20% nt an
0% 13.1% 15% me
-5% 4,000 Ce
-10% 10%

-15% 2,000 5%
-20%
3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8
Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 Jun-1 Sep-1 Dec-1 Mar-1 0 Q1 Q2 Q3 Q4 0%
Source: National Bureau of Statistics of China, Guotai Junan International. Source: Listed Company data, Guotai Junan International.

Figure- 11: Construction Contracts Backlog Growth by Figure- 12: Growth of New Contract Signed by Provinces
Province as of 1Q18 as of 1Q18
50% 80%
45% 70%
40% 60%
35% 50%
30% 40%
25% 30%
20% 20%
15% 10%
10% 0% ort
5% -10% p
e
0% -20% R
GuangdongInner MongoliaXinjiangQinghaiGuangxiAnhuiHenanFujianHubeiJiangxiShanxiGuizhouHeibeiShaanxiChongqingYunnanShandongHainanJiangsuHunanBeijingTianjinSichuanJilinShanghaiHeilongjiangZhejiangGansuLiaoningNingxia -30% YunnanShanxiQinghaiGuangdongJilinFujianHubeiHainanHenanJiangxiJiangsuSichuanZhejiangChongqingLiaoningHeilongjiangAnhuiGuangxiGuizhouShanghaiHunanGansuInner MongoliaBeijingHeibeiShandongShaanxiTianjinNingxiaXinjiang Sector
Source: National Bureau of Statistics of China, Guotai Junan International. Source: National Bureau of Statistics of China, Guotai Junan International.
See the last page for disclaimer Page 4 of 18
P Cement and C onstruction Materials Sector

TIGHT SUPPLY CONTINUES TO BE THE MAIN TONE

Normalization of production suspension has resulted in greater control of power over clinker supply from leading
suppliers. With the impact brought by the longer and wider implementation of off-season production halts, as well as the
supernormal production suspensions held for air quality control purposes in eastern and southern China, we see effective 18
0
2
production days for clinker to be largely squeezed. This has naturally reduced clinker supply to independent grinding stations, y
a
M
and also being the key catalyst for tight supply-demand (S-D) relation in the cement industry. Based on the newest off-season 4
production halt schedule in 2018, we estimate that effective clinker capacity (which deducts the non-operating days during

production halts) will be cut down further to approx. 1314 mt in 2018, with capacity utilization approaching approx. 95% based
on our demand outlook, if the scheme is implemented effective. This implies that under the off-peak production halt scheme,

domestic clinker S-D will continue to exhibit extreme tightness, reserving cement players' controlling power over clinker supply.

Table- 2: National Effective Clinker Capacity with Consideration to Winter Production Shift
Clinker capacity Annualized Days of Days of Days of Effective annual Effective annual Effective annual
clinker capacity production halts production halts production halts production production production
per day
in 2018 in 2016 in 2017 in 2018 capacity in 2016 capacity in 2017 capacity in 2018
Beijing 19 400 120 151 151 268 234 234
Tianjin 5 155 120 151 151 104 91 91
Hebei 326 8,988 120 154 154 6,157 5,303 4,242
Shanxi 228 6,246 120 151 151 4,314 3,768 3,768
Inner Mongolia 253 6,670 120 181 181 4,605 3,458 3,458
North China 832 22,459 15,448 12,854 11,794

Liaoning 176 5,048 136 166 181 3,239 2,815 2,603
Jilin 80 2,621 136 181 181 1,673 1,344 1,344
Heilongjiang 65 2,261 136 151 151 1,453 1,358 1,358
Northeastern China 321 9,929 6,365 5,516 5,304

Jiangsu 231 6,997 20 20 60 6,646 6,646 5,875
Zhejiang 238 7,187 0 30 35 7,223 6,629 6,530
Anhui 437 13,466 0 30 30 13,501 12,391 12,391
Fujian 177 5,341 40 40 60 4,756 4,756 4,463 材
建
Jiangxi 207 6,644 0 0 160 6,659 6,659 3,740 泥
Shandong 333 11,119 106 106 120 7,940 7,940 7,511 水
Eastern China 1,623 50,754 46,724 45,020 40,510 or
Henan 322 9,753 12 0 11 1 11 1 6,617 6,860 6,860 ect
S
Hubei 233 6,801 0 90 90 6,851 5,162 5,162 s
HGuunaanng dong 236139 170,5,14523 200 12000 8450 79,,509829 59,,501829 58,,852642 aterial
Guangxi 254 7,433 20 20 50 7,056 7,056 6,442 M
n
Hainan 45 1,395 0 0 0 1,395 1,395 1,395 o
CCehnontrgaql iSngo uthern China 11,48306 453,5,02717 2 0 4 0 4 0 358,2,61090 345,9,01764 344,9,21465 structi
n
Sichuan 379 11,007 20 100 110 10,522 8,082 7,777 o
C
Guizhou 307 8,489 10 10 120 8,349 8,349 5,762 d
n
Yunnan 313 9,423 0 50 50 9,533 8,227 8,227 a
TSSiohbaueatt hnwxie stern China 12,110193 0 3543,5,474189 1 102 0 123 56 123 56 3333,7,498165 3 2393,5,183898 1 2363,5,193898 9 Cement
Gansu 155 4,056 120 135 135 2,743 2,575 2,575
Qinghai 47 1,516 120 120 120 1,018 1,018 1,018
Ningxia 61 1,879 120 100 100 1,288 1,393 1,393
Xinjiang 285 7,865 136 151 181 5,054 4,723 4,061
Northwestern China 751 20,865 13,887 13,246 12,584

Total 6,153 181,865 154,986 141,602 131,437

Source: Digital Cement, Guotai Junan International.

Table- 3: Domestic Capacity Utilization Rate Estimation
2010 2011 2012 2013 2014 2015 2016 2017 2018E
Supply side

New clinker capacity 256 230 185 126 72 47 26 20 10
Total effective designed clinker capacity 1221 1451 1636 1762 1834 1881 1832 1436 1324
Actual effective clinker capacity 1404 1669 1881 2026 2109 2163 2107 1652 1523
YoY % designed capacity 26.30% 18.8% 12.7% 7.7% 4.1% 2.6% -2.6% -21.6% -7.8%
Clinker to cement ratio 1.60 1.65 1.70 1.72 1.73 1.75 1.75 1.75 1.75
Demand side
Annual clinker output 1152 1281 1279 1362 1417 1335 1376 1397 1425
Clinker capacity utilization rate 82% 77% 68% 67% 67% 62% 65% 85% 94%
AAcntnuuaal lc ceemmeennt tc oauptapcuitt y 21683658 22806603 32115864 32345164 32345706 32431468 23440113 32333156 32123457 ort
p
Cement capacity utilization rate 71% 72% 69% 72% 74% 69% 70% 69% 72% e
R
Source: Digital Cement, National Bureau of Statistics of China, Guotai Junan International. or
ct
e
S

See the last page for disclaimer Page 5 of 18
P Cement and C onstruction Materials Sector

Homogenous price levels reduced cross-regional cement flow. Cement prices used to pose very obvious downward trends
from coastal regions to inland regions, as well as from southern regions to northern regions. This trend has been altered since
2017, as cement prices from northern China and central China rose substantially, contributed by the tightening regional S-D
relation triggered by off-season production halts and supernormal production suspension. The domestic cement market now
exhibits more homogenous price levels among regions, making cross regional cement flow less economical. With less impact 18
0
2
from cement inflow from outside regions, implementation of industry coordination has been brought to a more effective manner, y
a
M
which in turn facilitates supply control in the domestic cement market. 4

Figure-13: Cross Region Cement Prices in China (2015) Figure-14: Cross Region Cement Prices in China (2018)

Heilongjiang Heilongjiang

Jilin Jilin
Xinjiang Inner Mongolia BeijingTianLjiinaoning Xinjiang Inner Mongolia BeijingTianLjiinaoning
Ningxia ShanxiHebei Ningxia ShanxiHebei
Qianghai Shaanxi Shandong Qinghai Shaanxi Shandong
Gansu Henan Jiangsu Gansu Henan Jiangsu
Tibet SichuanChongqingHubei Anhui Shanghai Tibet SichuanChongqingHubei Anhui Shanghai
Zhejiang Zhejiang
Hunan Jiangxi Hunan Jiangxi
Guizhou Fujian Guizhou Fujian
Yunnan Yunnan RMB/t
Guangxi Guangdong TTTTaaaaiiiiwwwwaaaannnn >400 Guangxi Guangdong TTaaiiwwaann >500
350-399 450-499
HK 300-349 HK 400-449
250-299 350-399
Hainan 200-249 Hainan 300-349
<200 <300

Source: Digital Cement, Guotai Junan International. Source: Digital Cement, Guotai Junan International.

材
CEMENT PRICE AND PROFITABILITY
建
泥

水
Cement price decline during the slow season in 3Q2018 may be weaker than expected. As we expect a proportion of or
ct
e
4Q2018 demand to be front loaded to the period between May and Jul. in a bid to avoid the influences from construction layoffs S
s
and supernormal production suspension during the heating season, we believe that cement prices could therefore be held erial
stable during this period. This prompts us to believe that the traditional price decline starting from June may be delayed, with Mat
n
price decline magnitude also being less significant. Therefore we think that cement price in 3Q2018 will be less volatile, which o
cti
u
also implies that annual cement ASP might be higher than market expectations. str
n
Co
d
Coal price has stabilized; a new high in industry earnings is highly likely in 2018. While coal price sets the main floating an
nt
costs that could directly impact on cement players’ profitability, we have seen domestic coal price decline substantially post the me
e
heating season. Given looser S-D in the coal industry since Dec. 2017 and with less administrative interference in the C
production side during 2Q and 3Q, as well as high inventory from both power plants and ports, we believe coal prices would not
likely pick up its momentum until 4Q. This suggests that cement players’ profitability will continue to dominate by cement prices.
Given decent downstream demand as a backdrop, we believe industry earnings are highly likely to exceed the peak in 2011.

Earnings from our covered cement stocks may still be underestimated by the market. While uncertainties in 2H18
downstream demand set the key concern for a potentially larger-than-expected cement price decline, we believe such concerns
may be excessively magnified by the market in cement ASP assumptions for cement stocks. Among our coverage, we see 10%
to 20% further upward earnings revision potential, despite that the market has already revised their FY18 earnings forecasts
consensus by approx. 20% in Apr. We believe that another revision will likely be made during Jun. and Jul., after the market
observes better-than-expected downstream demand trend, as well as cement price performance.

ort
p
e
R
or
ct
e
S
See the last page for disclaimer Page 6 of 18
P Cement and C onstruction Materials Sector

Figure-15: Simulated Blended Cement Prices for Conch's Figure-16: Simulated Blended Cement Prices for CRC's
Operating Region Operating Region
45R0MB/t 2015 2016 2017 2018 45R0MB/t 2015 2016 2017 2018 18
0
2
y
a
400 400 M
4
350 350
300 300
250 250

200 200
J F M A M J J A S O N D J F M A M J J A S O N D
an eb ar pr ay un ul ug ep ct ov ec an eb ar pr ay un ul ug ep ct ov ec

Source: Digital Cement, Guotai Junan International. Source: Digital Cement, Guotai Junan International.

Figure-17: Simulated Blended Cement Prices for CNBM's Figure-18: Regional Cement Prices in China
Operating Region
North China Northeast China
East China Central South China
RMB/t 2015 2016 2017 2018 RMB/t Southwest China Northwest China
450 550
500
400
450
材
350 400 建
泥
350 水
300 or
300 ect
S
250 s
250 al
eri
200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 uction Mat
Source: Digital Cement, Guotai Junan International. Source: Digital Cement, Guotai Junan International. nstr
o
C
d
Figure-19: National cement-coal Price Gap Figure-20: QHD5,500Kcal Thermal Coal Prices an
nt
RMB/t Cement-coal price gap RMB/t RMB/t 2013 2014 2015 eme
350 QHD5,500 thermal coal FOB (RHS) 900 900 2016 2017 2018 C
800 850
300
800
700
250 750
600
700
200 500
650
150 400 600
300
100 550
200 500
50
100 450
0 0 400
F A F A F A F A F A F A F A F
eb ug eb ug eb ug eb ug eb ug eb ug eb ug eb 350
-1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 Jan Feb Mar Apr May Jun Jun Jul Aug Sep Oct Nov Dec
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8

Source: Digital Cement, Guotai Junan International. Source:CCTD, Guotai Junan International.

ort
p
e
R
or
ct
e
S
See the last page for disclaimer Page 7 of 18
P Cement and C onstruction Materials Sector

A FEAST BROUGHT BY POTENTIALLY BETTER-THAN-EXPECTED 2H18 DOW NSTREAM DEMAND

On top of the solid outlook for S-D dynamic driven by: 1) expectations of robust 2H18 downstream demand continues to
promote historically high cement shipment, with support from ample construction contract backlog; 2) supply restrictions due to
supernormal production suspension and off-season production halts for air quality control purposes; 3) high barriers for new 18
0
2
capacity; we believe 2H18 is shaping up to carry historical momentum for the domestic cement industry, with leading players' y
a
M
earnings breaking expectations from the market. While new capacities are not expected to be introduced in scale, the potential 4
downward industry cycle would only likely be triggered by downstream demand slowdown, which will eventually come but is not

expected to arrive in the coming two years given the current enormous amount of construction workload in the pipeline. This
underpins that sector earnings may stay at a high plateau over the next two years, with the ROIC of industry players holding

high and relatively stable compared to the past. This also implies that cement stocks may continue to be traded at low PER and
high PBR with a consistent earnings peak. Among our coverage, we like China Resources Cement (“CRC”) for its high

dividend yield (more than 7%-9%) as well as stability. We also like China National Building Material's (“CNBM”) strong

share price upside delivered by its strongest earnings elasticity and revaluation potential that might gradually be
realized by the market. Anhui Conch remains as our long-term top-pick given its strong growth potential from both
domestic and overseas markets, as well as the feasibility of ROIC hikes brought by M&As in the medium to long term.
Therefore, we will maintain the "Outperform" sector rating.

Table- 4: Peers Valuation Comparison
GP Net Market
PE (fiscal year) PB (fiscal year)
Company ROE(%) Margin(%) Margin(%) Cap
Stock Code Currency Last price 17A 18F 19F 20F 17A 18F 19F 20F 18F 18F 18F HKD mil
HK Listed Peers

Anhui Conch Cement Co Ltd-H 914 HK HKD 47.25 13.6 9.4 9.3 9.1 2.3 2.0 1.7 1.6 21.7 40.9 24.6 250,392
China National Building Ma-H 3323 HK HKD 8.82 12.8 7.1 7.8 7.1 0.9 0.7 0.7 0.7 9.5 30.0 3.6 56,347
China Resources Cement 1313 HK HKD 7.95 14.4 8.6 8.4 8.2 1.7 1.5 1.4 1.3 18.4 36.4 17.0 51,937
Asia Cement China Holdings 743 HK HKD 4.29 9.7 3.7 3.5 2.9 0.6 0.5 0.4 0.4 14.1 30.0 15.7 6,722
材
China Shanshui Cement Group 691 HK HKD 6.29 50.7 15.2 n.a. n.a. 2.7 n.a. n.a. n.a. n.a. n.a. n.a. 21,255
建
West China Cement Ltd 2233 HK HKD 1.54 10.2 6.2 5.6 5.2 1.1 0.8 0.8 0.7 14.8 31.1 21.6 8,367 泥
Bbmg Corp-H 2009 HK HKD 3.51 11.3 7.9 6.9 6.3 0.8 0.6 0.5 0.5 7.3 27.0 5.2 51,403 水
Simple Average 17.0 8.6 7.0 7.0 1.4 1.0 0.9 0.9 13.9 32.6 13.1 or
Weighted Average 14.9 9.1 8.0 7.9 1.8 1.4 1.3 1.2 16.3 32.8 16.4 ct
e
S
s
MAnahinulia Cndo nLcisht eCde mPeeenrts C o Ltd-A 600585 CH CNY 34.28 11.4 8.4 8.3 7.8 2.0 1.7 1.5 1.4 20.8 40.9 24.6 230,887 erial
Tangshan Jidong Cement Inv-A 000401 CH CNY 12.00 150.0 20.8 12.6 6.8 1.6 1.4 1.3 1.0 12.2 29.3 6.4 19,989 Mat
Huaxin Cement Co Ltd-A 600801 CH CNY 14.58 10.5 8.4 7.1 6.5 1.8 1.5 1.3 1.2 19.9 33.2 12.6 23,204 n
o
Gansu Qilianshan Cement Gr-A 600720 CH CNY 8.12 11.0 7.4 6.2 5.9 1.2 1.1 1.0 0.9 15.2 34.5 13.0 7,792 cti
NXiinnjgiaxniag BTuiailndsinhga nM Cateemriaelnst--AA 600000484797 CCHH CCNNYY 98..4829 1239..35 1105..11 87..69 87..21 11..03 01..91 01..90 00..89 109..81 3353..50 89..87 115,,556258 nstru
Xinjiang Qingsong Buildin-A 600425 CH CNY 3.69 92.3 n.a. n.a. n.a. 1.3 n.a. n.a. n.a. n.a. n.a. n.a. 6,289 Co
Jiangxi Wannianqing Cem-A 000789 CH CNY 13.00 17.2 10.6 9.0 8.0 2.5 2.2 2.0 1.9 20.6 33.6 9.7 9,857 d
n
Guangdong Tapai Group Co -A 002233 CH CNY 11.80 15.5 12.7 9.5 8.4 1.7 1.5 1.3 1.2 14.0 36.4 21.3 17,391 a
SJiilnino mYaat aIni tGerrnoautpio Cnoa l LEtdn-gAin -A 660000987801 CCHH CCNNYY 84..1479 1146..66 1106..48 n8.a.5. n7.a.2. 11..90 n1.a.6. n1.a.4. n1.a.2. 1n6.a.0. 1n7.a.1. n6.a.3. 1178,,701372 ment
e
Xiamen Academy Of Building-A 002398 CH CNY 13.79 24.6 18.5 13.5 10.8 2.1 1.9 1.7 1.5 10.4 27.8 10.7 5,900 C
China West Construction Gr-A 002302 CH CNY 34.80 143.6 39.9 39.9 24.3 2.9 2.8 2.7 2.5 4.4 10.4 1.6 22,408

Simple Average 42.3 14.9 11.9 9.2 1.7 1.6 1.5 1.3 14.0 30.2 11.3
Weighted Average 28.5 11.8 9.8 8.1 1.9 1.6 1.4 1.3 16.9 33.5 17.7
Source: Bloomberg, Guotai Junan International.

Figure- 21: PER band for Cement Sector Figure- 22:PBR Band for Cement Sector
Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
25 4
(x) (x)
20
3
15
2
10
5 1
0
Anhui Conch CRC CNBM BBMG WCC 0 Anhui Conch CRC CNBM BBMG WCC ort
p
e
PER (historical) PER (current) PER (high) PBR (historical) PBR (current) PBR (high) R
PER (low) PER band PBR (low) PBR band or
ct
e
Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International. S
See the last page for disclaimer Page 8 of 18
h
股 c
r
a
票 se
e
R
研
ty
究 qui Company Report: Anhui Conch (00914 HK) Sean Xiang 向宇豪
E
公司报告：安徽海螺 (00914 HK) [phone]
[email protected]

4 May 2018

Further Valuation Hikes Need to be Justified by Higher
Dividend Payout Amid Slow M&As, Maintain "Accumulate"

公 ort 进一步估值提升在缓慢的并购背景下需要更高的派息率来支撑，维持“收集”
p
司 Re  1Q18 core earnings surged by 201%. The top line boosted by 37.6% YoY Rating: A c c umulate
y with cement sales volume basically remaining flat compared to 1Q2017, while Maintained
报 an cement ASP rose by approx. 34% YoY. Gross profit surged by 95.5% YoY,
告 mp with GPM at 41.3%, improving 12.3 ppt YoY. GP/t for cement products are 评级： 收集 (维持)
o estimated at RMB136/t, up by approx. 100% YoY. Net profit came to
C
RMB4,778 million, improving 121.9% YoY. Excluding the non-recurring items 6-18m TP 目标价: HK$55.00
in 1Q18 and 1Q17, Conch's 1Q18 core earnings would soar by 200.7% YoY. Revised from 原目标价: HK$49.50

 Historically high regional cement shipment results alongside Share price 股价： HK$47.250
better-than-expected price hikes during Apr. Current cement shipments in

both eastern and southern China are at historically high levels, with nearly full
Stock performance
grinding capacity utilization and very low cement and clinker inventory, which
股价表现
sets a key pillar for stable cement price, even in the slow season during 3Q18
and supporting an even higher margin in 2H18 for Conch. 90.0 % of return
80.0
证 ort  Fmuaritnhteari nv "aAlucactuiomnu hlaiktee" n. Ceeodnsc ht ois bceu rjruesnttilyfi evda lubeyd h aitg 2h.e1rx dFiYvi1d8e PndB Rp,a wyohiucth, 7600..00
p 50.0
券 e seems adequate based on its ROE forecasts. With slower M&As, potentially
R 40.0
研 ch due to expensive costs in the past two years, Conch's valuation hike should 30.0
究 ear baels oju swteifilel de sbtyim haigtehde rb dyi vtihdee nmda prakeyot u(rta, nggivienng tfhroamt F YR1M8B e2a2r nbinng tso foRrMecBa2s7ts banr)e. 1200..00
s
报 Re Therefore, we raise Conch's TP price to HK$55.00 in reflection of the 0.0
y fine-tune in earnings and maintain the "Accumulate" investment rating. (10.0)
告 uit May-17 Jul-17 Oct-17 Jan-18 Apr-18
q  2018年一季度核心盈利大增201%，符合预期。在水泥价格同比上升约34%的情况下收入 HSI Index Anhui Conch
E 同比上升37.6%，与2017年一季度相比水泥销量同比基本持平。毛利大增95.5%并且毛
利率录得41.3%，同比改善12.3个百分点。水泥产品吨毛利预计在人民币136元，同比 Change in Share Price 1 M 3 M 1 Y
股价变动 1个月 3个月 1年
提升约100%。净利润录得人民币47.78亿元，同比提升121.9%。剔除2018年一季度和
20 17年一季度的非经常科目，海螺水泥2018年一季度核心净利同比大幅提升200.7%。 A绝b对s. 变%动 % 2.7 5.7 78.3
Rel. % to HS index
 历史最高发货量使得四月涨价超预期。当前华东和华南水泥发货量录得历史最高水平，在 相对恒指变动 % 2.2 12.3 50.9
水 on 水泥磨机开工率满产的背景下水泥和熟料库存探底，这也将作为稳定水泥价格的基础，即 A平v均g. 股sh价ar（e 港pri元ce）(H K$) 46.4 43.4 34.4
ctir 便是在2018年第三季度的淡季。这同时也将支撑海螺水泥在2018年下半年更高的利润率。 Source: Bloomberg, Guotai Junan International.
泥 uo
strect  进一步的估值提升需要更高的派息率来支撑，维持“收集”。海螺水泥目前估值相当于2.1
建 Cons S 倍 2018财年市净率，基于其净资产回报率的预测看似较为合理。在并购可能在近两年由
材行 nt and Material 于2基7高于0亿企最的的新范代的围价盈)而利的推调情迟整况的我下背们，景上海下调螺，对水在海泥其螺进水2一0泥步18的的财目估年标值盈价提利至升也需5被5要.市0被0场港更充元高分，的预并派期且息(在维率人持来民“支币收撑集。22”因0的亿此投至，
业 me 资评级。

Ce

Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE
年结 收入 股东净利 每股净利 每股净利变动 市盈率 每股净资产 市净率 每股股息 股息率 净资产收益率
12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%)

2016A 55,932 8,574 1.618 △13.7 25.5 14.400 2.9 0.500 1.2 11.7
K) 2017A 75,311 15,899 3.000 85.4 13.4 16.823 2.4 1.200 3.0 19.2
H 2018F 91,331 26,117 4.928 64.3 7.8 20.551 1.9 2.070 5.4 26.4
安 14 2019F 94,566 29,481 5.563 12.9 6.9 24.045 1.6 2.392 6.3 24.9
徽 009 2020F 97,581 31,489 5.942 6.8 6.4 27.594 1.4 2.674 7.0 23.0
(
海 ch Shares in issue (m) 总股数 (m) 5,299.3 Major shareholder 大股东 Conch Holdings 36.5%
n Market cap. (HK$ m) 市值 (HK$ m) 250,392.1 Free float (%) 自由流通比率 (%) 63.5%
o
螺 C 3 month average vol. 3个月平均成交股数 (‘000) 12,124.7 FY18 Net gearing (%) FY18净负债/股东资金 (%) Net cash
ui 52 Weeks high/low (HK$) 52周高/低 49.950 / 24.500 FY18 Est. NAV (HK$) FY18每股估值（港元） 61.3
h
n Source: the Company, Guotai Junan International.
A

See the last page for disclaimer Page 9 of 18
Cement and C onstruction Materials Sector

EARNINGS REVISIONS

Table- 5: Key Earnings Assumptions

Old Forecast New Forecast Revision

2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 8
1
Operations 0
2
ASP/t (RMB) 283 286 288 295 298 300 4.2% 4.2% 4.2% y
a
Unit cost/t (RMB) 164 164 164 162 157 155 -1.5% -4.5% -5.3% M
GP/t (RMB) 119 122 124 133 141 145 12.1% 15.9% 16.6% 4

Sales Volume (Mt) 303 310 318 303 310 318 0.0% 0.0% 0.0%
QHD 5500K coal price (RMB/t) 640 640 640 640 620 615 0.0% -3.1% -3.9%
Cement-coal price gap (RMB/t)) 245 248 250 259 265 268 5.7% 6.7% 7.0%

Financials (RMB Mn)
Revenue 87,616 90,758 93,678 91,331 94,566 97,581 4.2% 4.2% 4.2%
Gross profit 38,011 40,665 42,329 42,342 46,812 49,689 11.4% 15.1% 17.4%
Operating profit 32,632 35,263 36,674 35,749 40,168 42,756 9.6% 13.9% 16.6%
Other income 1,918 2,078 2,012 1,668 1,871 1,826 -13.0% -9.9% -9.2%
Profit before tax 32,086 34,830 36,364 35,226 39,768 42,479 9.8% 14.2% 16.8%
Net profit 23,791 25,823 26,960 26,117 29,481 31,489 9.8% 14.2% 16.8%
EPS (RMB) 4.489 4.873 5.087 4.928 5.563 5.942 9.8% 14.2% 16.8%
BPS 20.009 22.894 25.783 20.551 24.045 27.594 2.7% 5.0% 7.0%

Margins and ratios
Revenue growth 16.3% 3.6% 3.2% 21.3% 3.5% 3.2% 4.9ppt 0.0ppt 0.0ppt
Gross profit growth 48.9% 7.0% 4.1% 65.9% 10.6% 6.1% 17.0ppt 3.6ppt 2.1ppt
Net profit growth 49.6% 8.5% 4.4% 64.3% 12.9% 6.8% 14.6ppt 4.3ppt 2.4ppt
Gross margin 43.4% 44.8% 45.2% 46.4% 49.5% 50.9% 3.0ppt 4.7ppt 5.7ppt
Net Profit Margin 27.2% 28.5% 28.8% 28.6% 31.2% 32.3% 1.4ppt 2.7ppt 3.5ppt
ROE 24.4% 22.7% 20.9% 26.4% 24.9% 23.0% 2.0ppt 2.2ppt 2.1ppt

Source: Guotai Junan International.

Table- 6: Sensitivity Analysis for Conch's EPS
EPS (RMB)
EPS Sensitivity Analysis
2018F 2019F 2020F
Base Case EPS (RMB) 4.928 5.563 5.942
Base Case Assumptions
Average QHD5,500Kcal FOB (RMB/t) 640 620 615
ASP/t (RMB) 295 298 300
GP/t (RMB) 133 141 145 K)
H
Sales volume of clinker and cement (Mt) 303 310 318 4
91
0
EPS (RMB) (0
Average QHD5,500Kcal FOB (RMB/t) +5% 4.452 5.094 5.469 螺
ASP/t (RMB) +3% 5.153 5.806 6.199 海
徽
GP/t (RMB) +5% 5.051 5.687 6.087 安
Sales volume of clinker and cement (Mt) +3% 4.927 5.581 5.970
h
c
n
EPS change (%) Co
Average QHD5,500Kcal FOB (RMB/t) +5% -9.7% -8.4% -8.0% ui
h
ASP/t (RMB) +3% 4.6% 4.4% 4.3% An
GP/t (RMB) +5% 2.5% 2.2% 2.4%
Sales volume of clinker and cement (Mt) +3% 0.0% 0.3% 0.5%

Source: Guotai Junan International.

Figure- 23: PER Curve (next year) for Anhui Conch Figure- 24: PBR Curve (current year) for Anhui Conch
Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
20 3.5
(x) 3.0 (x)
15 2.5
2.0
10 1.5
1.0
5 0.5 ort
Anhui Conch Anhui Conch ep
R
PER (historical) PER (current) PER (high) PBR (historical) PBR (current) PBR (high) ctor
PER (low) PER band PBR (low) PBR band e
S
Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International.

See the last page for disclaimer Page 10 of 18