by winston » Wed Aug 19, 2015 9:42 am
Cement - China
No Sure Sign Of A Turnaround In Cement Demand, More Effort Needed To Tackle Oversupply
Property construction will remain a lacklustre driver of cement demand in China due to the country’s high housing inventory, while supply constraints are not sufficient to offset the demand slowdown in 2015.
Despite the sector’s undemanding valuations, we initiate coverage on China’s cement sector with UNDERWEIGHT in the light of a lack of catalysts for a sector turnaround. Our key pick is BBMG.
INVESTMENT HIGHLIGHTS
Cement demand from property construction could have peaked despite possible rebound in property new starts in 4Q15. We expect the property sales improvement since Mar 15 to moderately speed up property new construction in 4Q15 from the very low base of a 17% contraction in 7M15 as property new starts normally lag property sales by 2-3 quarters.
Nevertheless, we are not convinced that there will be another round of property construction upcycle. Instead, we think China’s property new construction cycle could have peaked in 2013 due to the high housing inventory in lower-tier cities.
We still expect property new starts to decline 11% in 2015, a major drag on China’s cement demand this year. We expect China’s cement production to fall 3.5% in 2015 and the industry’s sales revenue to shrink by over 10% on cement price weakness this year.
More effort needed to reduce excess supply. Despite a slowdown in new supply addition in the cement sector over the past couple years due to government curbs, elimination of obsolete capacity declined from the peak of 220m tonnes in 2012 to 70m-
80m tonnes in each of 2013-14 and possibly by another 50m tonnes in 2015, leading to only a minor net decline in capacity this year.
Although the Chinese government has implemented higher standards for environmental protection, has shut down small plants
with a daily capacity of below 2,000 tonnes each and will eliminate the PC32.5 grade cement standard by Dec 15, we believe the removal of obsolete capacity is a long-term process and more effort is needed to reduce supply.
Industry consolidation and M&As to ramp up. We expect leading cement companies, such as Anhui Conch Cement Co, to gain more market share amid the industry weakness. We cannot ignore the possibility of Anhui Conch Cement Co increasing its stake in West China Cement (WCC) or even becoming its largest shareholder.
On the other hand, it would take time for the industry concentration rate (top 10 players) to rise from 38% currently to 50-60% before leading players can strengthen their pricing power.
A challenging year for earnings. Despite a potential mild cement price rebound in 4Q15, we project overall cement ASP to drop about 11% in 2015 and expect cement companies’ earnings to fall 30-60% in FY15.
Accumulate resilient regional players. The sector is trading at an undemanding valuation of 1.0x FY15F P/B and 14.2x FY15F PE, but we think the sector still lacks catalysts for a turnaround.
We like individual regional players that have resilient exposure or are M&A targets. BBMG Corporation is a key beneficiary of the Beijing-Tianjin-Hebei integration plan while its property business exposure will help offset the weakness of the cement business.
Source: UOBKH
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