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China Cement Weekly: More Policies Suggesting Long-Term Positives




Sun Hung Kai Financial


17 Dec 2013





Companies referenced:

600585.SS 0691.HK 0743.HK 1136.HK 1252.HK 1312.HK 1313.HK 1893.HK 2233.HK 3323.HK 601992.SS

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* Cement prices across China rose 0.2% last week, with the 4WMA up 0.4% w/w. Prices have stabilized across China. Inventory levels remained stable at 63% last week, but decreased in Eastern and South Central China owing to tight cement clinker supply. * Cement prices stabilized in Eastern China, while clinker continued to rise in Jiangsu and Anhui provinces. This resulted from tight supply owing to emission controls, and lower inventory levels meant cement producers kept more clinker for internal consumption. Additionally, the haze shrouding Eastern China and lower water levels have hindered inland waterway transport of cement and further tightened supply in Jiangsu and Zhejiang provinces. Cement prices in Eastern China are now 18.3% higher than the same time last year and only 2.4% below the FY12 peak. Strong year-on-year 4Q13 price growth and still decreasing inventory levels in Eastern China should translate into good year-on-year cement-price growth in 1Q13. Anhui Conch (914.HK, Buy, HK$33.00) and CNBM (3323.HK, Not Rated) would be the major beneficiaries. * Prices in Northern China remained stable, albeit demand has slowed since it is almost the end of the construction season. Cement producers in Tangshan, Hebei province are starting to restock inventory for winter and will halt production for maintenance after warehouses have been replenished. Although winter cement pricing policy has not emerged yet, we see limited room for prices to drop further during the off season in Hebei amid continued emission controls. Cement and clinker prices in the region are still around their two-year troughs. Continued improvements on the supply side should provide support for cement prices to turn around in 2014. * Central urbanization work conference further supports demand. The conference highlighted the improvement of urban construction, establishment of diverse financing channels, and greater land-use efficiency as three of the six major tasks for the next phase of China’s urbanization. We believe related infrastructure construction should support cement demand. The meeting also indicated environmental protection and sustainable development as high priorities amid urbanization, which suggests stricter requirements and enforcement of capacity phase-outs. * China’s State Council has announced the approval of cement projects to provincial governments. However, we believe another round of cement capacity expansion is unlikely in view of: 1) persistent overcapacity; 2) the government’s commitment to reducing air pollution; 3) industrial upgrades urged by the central government. Developing the likes of the cement industry seems no longer to be the best interests of local governments and some provinces have already stopped approvals for new capacity. We consider this policy shift to be a long-term positive. Decentralization should increase market influence over the cement industry and facilitate industry consolidation by quality companies with regional competence or financial strength. Our cement stock index dropped 3.8% last week vs. the HSI’s 2.1% decrease. The sector is still trading below its historical-average forward P/E and we believe improving industry fundamentals will provide opportunities for a sector rerating next year. Conch remains our top pick given its cost leadership, favorable exposure to Eastern and South Central China (where cement capacity growth has been the lowest in 2013), and solid financial position. Analyst cont...

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