20180710-中国银河国际证券-海螺水泥-00914.HK-1H18_Positive_Profit_Alert_Beat_Market_Expectations__Reiterate_BUY_5页_767kb

Conch Cement Summary

Core Content

Conch Cement (0914.HK; 600585.CH) released a positive profit alert for the first half of 2018 (1H18), indicating an expected net profit range of RMB12bn to RMB13.4bn, which is a significant increase of 80% to 100% compared to the previous year. This suggests that the company is likely to exceed market expectations for its full-year profit, based on historical seasonality patterns. The company's Q2 2018 net profit is projected to be at least RMB7.2bn, a 54% increase from Q1 2018's RMB4.78bn.

The positive profit growth is attributed to a sharp rise in cement prices year-on-year (YoY), with the gross profit per tonne showing a strong increase. Despite the rainy season typically causing price weakness, the decline has been relatively mild due to coordinated actions among major players and production suspensions due to environmental protection inspections, which have helped maintain high cement prices in key regions.

Key Financials

Income Statement Highlights (RMB'000)

• Revenue: Expected to grow significantly, with a 1H18 increase of RMB12bn-13.4bn.
• Gross Profit: RMB13.7bn to RMB17.5bn in 2018E, with a gross margin of 40.5%.
• Net Profit: Expected to be RMB7.5bn to RMB8.6bn in 2018E, with a net margin of 25.8%.
• Recurring Net Profit: RMB6.07bn to RMB8.41bn for 2018E.
• EPS: Expected to reach RMB4.20 for 2018E, up from RMB2.73 in 2017.
• Recurring EPS: RMB1.15 to RMB1.62 for 2018E, up from RMB2.73 in 2017.

Balance Sheet Highlights

• Total Assets: Expected to reach RMB133.5bn in 2018E.
• Shareholders’ Equity: Projected at RMB105.1bn in 2018E.
• Net Cash: The company has a strong net cash position, which should help it weather liquidity challenges in mainland China.
• Current Ratio: Expected to increase to 2.9x in 2018E, indicating improved liquidity.
• Quick Ratio: Expected to rise to 2.3x in 2018E, reflecting better short-term financial health.

Cash Flow

• Net Operating Cash Flow: Projected to be RMB25.6bn in 2018E, showing strong cash generation.
• Net Investing Cash Flow: Expected to be RMB-6.5bn, indicating capital expenditure.
• Net Financing Cash Flow: Projected at RMB-12.8bn, suggesting a focus on debt reduction.

Valuation Metrics

• PER (2018E): 8.6x, lower than the 2015–2017 average.
• PBR (2018E): 1.82x, slightly below the average of 1.86x since 2009.
• EV/EBITDA (2018E): 5.1x, reflecting a more attractive valuation.
• Growth Rates:
  • Revenue: 54% increase in 2018E.
  • EBIT: 63% growth in 2018E.
  • EBITDA: 48% growth in 2018E.
  • Core Net Income: 54% growth in 2018E.
  • Recurring EPS: 54% growth in 2018E.

Investment Highlights

• The company is expected to report strong earnings growth in Q3 2018 due to the seasonality pattern.
• The correction in share price over the past few weeks presents a good buying opportunity, with the current valuation being attractive.
• The company's business is not significantly affected by the trade war, and its strong cash balance sheet provides a buffer against market volatility.
• The H-share target price is set at HK$59.50 (+37.1%), while the A-share target price is RMB45.10 (+37.3%).

Key Regions and Price Trends

• East China: Cement prices remained high YoY, supported by coordinated efforts among major players and reduced inventory levels.
• South Central China: Similar trends were observed, with prices still strong despite the rainy season.
• Cement Price Trends: Figures 2 and 3 show mild price declines during the rainy season, which is less severe than expected.

Analysts and Contact Information

• Wong Chi Man: Head of Research, contact: (852)36986317, cmwong@chinastock.com.hk
• Mark Lau: Research Analyst, contact: (852) 3698-6393, marklau@chinastock.com.hk

Investment Rating

• Equity Rating: BUY
• Reasoning: The company is expected to see a >20% increase in share price within 12 months.

Disclaimer and Interests

• The report is not intended for distribution in certain jurisdictions.
• The company may have financial interests in the subject company, with holdings potentially equal to or exceeding 1% of the market capitalization.
• Analysts may have served as managers or provided investment services to the company.
• The report does not constitute an offer or invitation to buy or sell securities.

Analyst Certification

• The analyst certifies that the views expressed in the report reflect personal opinions.
• No part of the analyst's compensation is tied to the specific views in the report.
• The analyst has not traded in the securities covered in the report within 30 days prior to its release and will not do so within three business days after its release.