20150619-DBS_Group-Anhui_Conch_Cement_11页_459kb

Anhui Conch Cement Summary

Core Information

• Company: Anhui Conch Cement, one of the largest cement producers in China.
• Business Exposure: East China (31%), Central China (28%), South China (16%), and West China (22%).
• Cement Capacity: 264mt.p.a. as of end-FY14.
• Market Cap (H Shares): HK$154,210 million / US$19,892 million.
• Major Shareholders:
  • Anhui Conch Holdings: 36.8%
  • J.P. Morgan Chase & Co.: 13.8%
  • Genesis Asset Managers, LLP: 10.0%
  • BlackRock, Inc.: 7.5%
  • Investec Asset Management Limited: 5.0%
• Free Float (H Shares): 63.6%

Investment Analysis

H Shares

• Rating: BUY
• Price Target (H): HK$32.80 (13% upside from last traded price of HK$29.10)
• Analyst: Addison DAI
• Key Catalysts:
  • Accelerating industry consolidation
  • Strong balance sheet (6% net gearing)
  • Equity investments in other cement companies
• Earnings Forecast:
  • 2015F: EBITDA of RMB19,519 million, Pre-tax Profit of RMB14,619 million, Net Profit of RMB10,757 million
  • 2016F: EBITDA of RMB21,354 million, Pre-tax Profit of RMB16,411 million, Net Profit of RMB12,075 million
• EPS:
  • 2015F: RMB2.03 / HK$2.53
  • 2016F: RMB2.28 / HK$2.84
• EPS Growth:
  • 2015F: -2.0% (q-o-q)
  • 2016F: +12.3% (q-o-q)
• Valuation:
  • PE (15F): 11.5x
  • P/Book Value (15F): 1.6x
  • EV/EBITDA (15F): 6.8x

A Shares

• Rating: HOLD (Downgraded from BUY)
• Price Target (A): RMB26.27 (6% upside from last traded price of RMB24.88)
• Earnings Forecast:
  • 2015F: Net Profit of RMB10,757 million
  • 2016F: Net Profit of RMB12,075 million
• EPS (2015F): RMB2.03
• Valuation:
  • PE (15F): 12.3x
  • P/Book Value (15F): 1.7x

Key Points

• 2Q15 Earnings Expectation: Flat, with unit GP dropping to RMB52/t from RMB66/t in 1Q15, but sales volume increasing by 28% q-o-q.
• Industry Consolidation: Accelerating due to weak demand recovery and low profitability.
• Recent Acquisition: Jiangxi Shengta Cement (6.4mt.p.a. capacity) at RMB313/t, below industry replacement cost of RMB400/t.
• Market Share Boost: Expected to increase market share in Jiangxi by 7% to 14%.
• Overseas Expansion: South Kalimantan #1 production line (3,200t/d clinker capacity) operational, capacity utilisation improved to 90% in June 2015. South Kalimantan #2 expected to start in FY16.
• Target for Ex-China Capacity: 50mt.p.a. by end-2020.

Peer Comparison

Risks

• Macroeconomic Risks: If China's economic growth is worse than expected, cement demand could drop and trigger price competition.

Financial Highlights

Income Statement (RMB m)

• Revenue (2015F): RMB61,331 million
• Gross Profit (2015F): RMB19,760 million
• Operating Profit (2015F): RMB14,083 million
• Pre-tax Profit (2015F): RMB14,619 million
• Net Profit (2015F): RMB10,757 million

Balance Sheet (RMB m)

• Total Assets (2015F): RMB114,206 million
• Shareholder's Equity (2015F): RMB76,436 million
• Net Debt/Equity (2015F): 0.3x
• Current Ratio (2015F): 1.9x
• Quick Ratio (2015F): 1.4x

Cash Flow (RMB m)

• Net Operating CF (2015F): RMB15,071 million
• Net Investing CF (2015F): -RMB8,899 million
• Net Financing CF (2015F): -RMB5,445 million
• Free CFPS (2015F): RMB1.09
• Operating CFPS (2015F): RMB2.82

Conclusion

Anhui Conch Cement remains a significant player in the Chinese cement market with a strong presence across major regions. Despite a challenging environment with falling cement prices and weak demand recovery, the company is positioned to benefit from industry consolidation and its overseas expansion in Indonesia. The H shares are rated as BUY with a revised price target of HK$32.80, while the A shares have been downgraded to HOLD with a lower price target of RMB26.27. The company's financials show resilience, with a solid balance sheet and a clear path to expanding its market share and cement capacity.