We upgrade the Industry view to Attractive driven
by three factors – early signs of demand pick up,
slowing supply in 2013, and cyclical trough
valuations. We upgrade CNBM and Conch to OW.
Our top pick is Anhui Conch.
Early signs of demand pick up: We believe cement
demand is now stabilizing and may pick up in 4Q12- 2013.
1) Cement price has stopped declining in recent weeks.
2) Strong property sales and pick up in land sales suggest
property construction may accelerate. 3) Pick up in the
land sales market should help funding for local
government-led infrastructure projects.
Supply to slow down in 2013: Given sharp declines in
profitability, cement producers are cutting capex –
reflected in >30% decline in Sinoma’s order intake,
which has been a leading indicator of capacity addition.
Our bottom-up supply model suggests net supply growth
will slow to 1% in 2013 from 8% in 2012.
Prefer Northern and Eastern China: We prefer regions
with: 1) lowest cement prices; 2) less supply growth in
2013. Northern and Eastern China rank highest and the
producers exposed are BBMG, Conch and CNBM.
Cyclical trough valuation: With 40% share price falls
from 52-week highs, EV/t valuations have hit a cyclical
trough. Adding Anhui Conch to our Best Ideas List –
pure cement play, Eastern China exposure, near trough.
Catalysts: Potential cement price hike in 4Q on strong
season. Key risks: Further property tightening policy
and higher-than-expected supply addition.