Shandong tour takeaways
Mild demand recovery; we prefer cement over coal and aluminium
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Johnson Wan
Research Analyst
(+852) 2203 6163
johnson.wan@db.com
Laura Zhai
Research Analyst
(+852) 2203 5929
laura.zhai@db.com
James Kan
Research Analyst
(+852) 2203 6146
james.kan@db.com
Top picks
Yanzhou Coal (1171.HK),HKD13.58 Sell
China Shanshui Cement
(0691.HK),HKD5.65
Hold
Chalco (2600.HK),HKD4.00 Sell
Companies Featured
Yanzhou Coal (1171.HK),HKD13.58 Sell
2011A 2012E 2013E
P/E (x) 11.0 9.9 20.0
EV/EBITDA (x) 7.5 10.5 10.4
Price/book (x) 1.6 1.2 1.1
China Shanshui Cement
(0691.HK),HKD5.65
Hold
2011A 2012E 2013E
P/E (x) 7.3 8.5 8.5
EV/EBITDA (x) 5.3 5.7 6.0
Price/book (x) 1.6 1.5 1.3
Chalco (2600.HK),HKD4.00 Sell
2011A 2012E 2013E
P/E (x) 278.2 – –
EV/EBITDA (x) 14.8 66.8 85.3
Price/book (x) 0.7 0.9 1.1
We visited cement, coal, aluminium and property companies during our twoday
trip to Shandong. While we see evidence of a demand recovery for both
infrastructure and real estate in the region, the key issue remains supply; we
continue to believe that the cement sector has better supply discipline going
into 2013, with further price participation. For the near term, we still prefer
cement over coal and aluminium as we believe it could take longer for the coal
and aluminium sectors to shake off excess capacity.
Shanshui – Solid start to 2013
Shanshui has seen a good start to 2013, with much stronger sales in January
YTD due to a recovery in infrastructure projects. Property-related concrete
sales have also seen a 20% YoY pickup since 2H12. The daily output for the
group is currently about 50kt, more than double that of last year. Clinker
inventories are at much lower levels than the same time last year, at c.60% of
storage capacity, after production was halted for 15 days in December. There
has been a change in the inventory management strategy in 2013 to reduce
clinker inventories in 1Q. Further production cuts of one month can be
expected in February and cooperation with CNBM continues to be seamless.
Centaline – Stable property demand but limited growth ahead
Centaline views commodity property demand-supply in Shandong to be stable.
Huge growth in commodity housing sales has passed due to stagnant
population growth, so the “pie” is unlikely to get bigger. However, it continues
to expect 5% growth for 2013 in Jinan and Qingdao due to continual
population inflow from nearby cities. Though Tier 3-4 cities in Shandong are
suffering from severe overcapacity, construction will continue due to the
government’s push for urbanisation. While this may not be positive for
developers in the medium term, it is positive for construction materials
demand since population is sparse and there is ample land supply.
Yanzhou Coal – Coal prices to stabilise around current level in 2013
Yanzhou Coal believes that coal prices in 2013 are not likely to experience wild
fluctuations as in 2012 but the market will continue to see oversupply;
therefore, it believes prices will stabilise around the current level. This implies
that the average coal price for 2013 would decline from 2012. This is similar to
our house view, which calls for a 9% YoY decline in coal prices for 2013. In
addition, the company is considering the possibility of closing down two mines
in Australia to enhance profitability.
China Hongqiao – Low-cost producer of value-added products wins
Hongqiao continues to operate as a low-cost producer in China amongst its
money-losing peers given its high level of own power supply (55% in 2012),
premium quality alumina products, close proximity to its downstream
customers (minimal transportation costs and robust demand) and value-added
products (molten aluminium sold at a premium price). With the aluminium
market still experiencing oversupply and high inventory pressures this year,
aluminium prices are unlikely to increase significantly from the current level;
therefore, it will be difficult for marginal cost producers such as Chalco to
make a profit.