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Trip takeaways – shaky demand but
positive attitude of Conch is key
South and East China cement trip – caution for 2Q but Buy on weakness
________________________________________________________________________________________________________________
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. MCI (P) 148/04/2014.
Johnson Wan
Research Analyst
(+852) 2203 6163
johnson.wan@db.com
James Kan
Research Analyst
(+852) 2203 6146
james.kan@db.com
Key Changes
Company Target Price Rating
1101.TW 54.00 to
52.77(TWD)
-1893.HK 1.91 to 1.66(HKD) -1102.TW 35.97 to
39.59(TWD)
-Source: Deutsche Bank
Top picks
Anhui Conch Cement (0914.HK),HKD29.25 Buy
CR Cement (1313.HK),HKD5.38 Buy
Source: Deutsche Bank
Sinoma (DBe vs Cons)
DBe Cons % diff FY14E 0.15 0.17 -13%
FY15E 0.18 0.20 -8%
FY16E 0.22 0.21 3%
Source: Deutsche Bank, Bloomberg Finance LP
TCC (DBe vs Cons)
(TWD) DBe Cons %diff
FY14E 3.52 3.28 7%
FY15E 4.27 3.53 21%
FY16E 4.93 3.61 37%
Source: Deutsche Bank, Bloomberg Finance LP
ACC(DBe vs Cons)
(TWD) DBe Cons %diff
FY14E 2.64 2.6 2%
FY15E 3.18 2.95 8%
FY16E 3.65 3.21 14%
Source: Deutsche Bank, Bloomberg Finance LP
Earning changes
FY14E New Old %chg
Sinoma (RMB) 0.15 0.17 -11%
TCC (TWD) 3.52 3.86 -9%
ACC (TWD) 2.64 2.57 3%
Source: Deutsche Bank
Related recent research Date
Sweet spot in the super cycle
Johnson Wan
19 Feb 2014
Source: Deutsche Bank
This report changes price targets, and
estimates for several companies under
coverage (see tables above).
Many investors have grown concerned with the slow start to 2Q this year,
particularly in East China due to weak commodity housing starts and poor
weather. As a result, inventories have risen and near-term price hikes could
prove challenging. However, infrastruc ture-led demand in South China has
been extremely resilient, driving price hi kes even in the slow season. Given the
high expectations of 2Q price hikes and the weak macro picture of late,
sentiment for cement names has dampened. However, we believe the solid
fundamentals of the sector remain intact and the 2H14 pricing outlook will
improve. Buy on correction.
Have prices peaked in 2014? Unlikely; we expect more price hikes in 2H14
We believe lower priced regions such as GX and Hunan will continue to see
price hikes in 2Q while higher priced re gions such as Zhejiang will see prices
maintained through production halts. For 2H14, we are constructive on
demand and pricing as 1) there are signs property is now loosening through
administrative measures; 2) government continues to boost infrastructure
spending, i.e. railways, and projects announced have yet to start; 3) seasonally,
4Q weather is better leading to more construction starts; 4) construction
activity in Nanjing is being pushed back until after Youth Olympics in August; 5)
the strong mindset of producers to keep pricing high has never been firmer.
Weakness in commodity residential housing has much less impact on cement
Given the high inventory levels of homes, new starts and those under
construction have slowed. Price cuts to boost sales are now seen across the
nation, hurting margins for developers and prompting buyers to take a wait-and-see approach. However, the impact on cement is less than perceived as
commodity residential housing only ac counts for c.10-15% of total cement
demand, though slower sales may have broader implications on the economy.
What is interesting is that mortgage lending by banks has grown by 20.8% in
1Q14 which suggests strong pent-up demand for first-home users. We believe
the segment most affected is upgrader s (c.40% of total sales) where homes
are more expensive and credit availability is tight. By June, the BIG 6 banks will
also enter IRB which in theory will increase mortgage availability, so the
underlying fundamentals for property should actually be improving.
We prefer strong infrastructure-related regions; top picks: Conch and CRC
In previous years, weak demand in the peak season has lead to sharp price cuts.
However, we believe this will not occur this year due to limited new supply and
the strong mindset of leading producers (in particular Conch) to maintain price
stability. By June 2014, the documentation of low-grade cement removal should
also be released. These form the basis of our multi-year supe r cycle call. As a
base case, we believe 2Q unit profitability for most companies will still see mild
improvement QoQ due to higher utilization rates and lower coal prices. This year,
the regions that have the best upward price momentum are those that have
limited new supply and are exposed to regions with strong infrastructure
demand: GD, Fujian, Hubei, Anhui, Chongqing and Shaanxi. The companies
most exposed are CRC and TCC in South China and WCC in Western China.
Conch continues to be the most defensive due to its superior low cost and
diversified nationwide exposure. We base our target prices on PE, key risks:
greater-than-expected slowdo wn to property (see p. 29 onwards for detail
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