China / Hong Kong Industry Focus China Cement ... - DBS Bank momentum will resume and support cement...

ed- JS/ sa-CS / DL

Focus is on supply-side policy

• Infrastructure projects rebound partly mitigated

the slowing property investment • Cement price outlook in the Southern China

market is better than the North • Margins supported amid weaker coal price • Reinstating coverage with BUY on China Resources

Cement (1313 HK), HOLD on Conch Cement (914

HK) and FULLY VALUED for China National Building

Material (3323 HK)

Cement consumption improvement in infrastructure projects

partly mitigated the slowing property investment. The continued

China infrastructure projects rebound, underpinned by

construction of pent-up infrastructure projects that commenced

this quarter, should help to partly mitigate the slowing cement

consumption from property investment. We expect China

cement consumption to decrease 4.1% y-o-y this year, before

we see a further contraction of 2.0% in 2019. Our 2019 growth

projections for infrastructure (+1.6% from 2018), urbanisation

construction (+3.8%), are offset by a decline in property

segment (-8.7%), which reflect our China Property Team’s latest

forecast of a 15-20% decline in the property sales volume.

Supply side discipline is a plus for South China market. The

sector focus is on supply-side policy next year. China’s cement

industry capacity utilisation rate is expected to remain stable

towards 2020 under the new off-peak production scheme and

the cessation of low-grade cement production. Moreover, we

expect the current production coordination would continue

amid the mild slowdown in market consumption. Overall, we

expect the Southern market to register better capacity utilisation

and profitability, resulting in better cement prices performance

next year, unlike the Northern market which is facing price

pressure.

Reinstating coverage - BUY CRC, HOLD Conch, FULLY VALUED

rating on CNBM. Our top pick is China Resources Cement (CRC)

given its attractive valuation and dominant position in the South

China market and better mid-term growth potential from its

new developing business. Conch Cement’s low-cost advantage

and ample cash should help to weather the industry’s price

volatility, while overseas project investments which are

generating low returns, and the group’s latest reorganization

remain uncertain. Recommend HOLD Conch Cement “H”, and

prefer Conch Cement “A” (600585 CH; BUY) which has lower

valuation. We have a FULLY VALUED rating on China National

Building Material (CNBM) given its high leverage level.

HSI: 26,332

ANALYST Duncan CHAN +852 36684178 [email protected]

Recommendation & valuation

Source: Thomson Reuters, *DBS HK, Bloomberg Finance L.P.

Target Mkt PE

Price Price Cap 19F

Local$ Local$ Recom US$m x

China Resources Cement

Holdings* (1313 HK)

7.23 9.00 BUY 6,326 6.03

Anhui Conch Cmt. 'A'*

(600585 CH)

31.47 37.00 BUY 24,538 6.18

Anhui Conch Cement 'H'*

(914 HK)

40.5 44.00 HOLD 24,538 7.06

China National Building

Material 'H'* (3323 HK)

5.89 5.80 FV 4,043 5.10

DBS Group Research . Equity

China / Hong Kong Industry Focus

China Cement Sector

28 Nov 2018

Refer to important disclosures at the end of this report

Industry Focus

China Cement Sector

Concerns on fading impact from supply-side reform

According to the Chinese government and China Cement

Association’s plan to cut capacity (2017-2020), we expect clinker

capacity in China to fall by 1.6% (or 30 million tonnes per

annum (mtpa)) in 2019F/2020F. This is a reversal of the positive

growth of 1.0% in 2018 following measures by the government

to restrain new capacity since 2009. Under the new off-peak

season production policies pertaining to stricter environmental

protection regulation, we expect China’s cement production

capacity utilisation to gradually improve.

China capacity utilisation rate

Source: DBS HK

The Fen-Wei Plains. The China government initiated a new

Three-year Action Plan (2018-2020) on 27 June 2018 to tackle

air pollution. This is an updated version of Air Pollution Action

Plan that ended last year (2013-2017). The key regions have

been expanded to cover Fen-Wei Plains, which include Xi’an and

parts of Shaanxi, Henan and Shanxi. These areas accounted for

about 12% of China’s clinker capacity in 2017. This Fen-Wei

Plains suffers from the country’s highest level of sulphur dioxide

pollution while PM2.5 levels are also among the highest

nationwide, and air quality had worsened between 2015 and

2017. Adding the Plains to the Action Plan should contribute to

a 2% reduction to China’s clinker production, on our estimate.

The State Council has set a target to improve air quality by 2020

through reduction of total emissions of sulphur dioxide (SO2)

and nitrogen oxides (NOx) by 15%, and reduction of heavy

polluted days by 25%. Based on data available, Chinese cities

have yet to reach the World Health Organisation (WHO)’s

recommended annual average PM2.5 level of 10 micrograms per

cubic metre (µg/m3). As at the end of 2017, only 107 of China’s

338 cities at the prefectural level or higher had achieved the

WHO’s interim standard of 35µg/m3. Under the latest winter

production suspension scheme, certain provinces in the north

such as Shandong announced steps to raise production during

winter for companies engaged in coordinated solid waste

projects. However, this incremental production volume is offset

by stricter production regulations in the Yangtze Delta River

market, for example, production has to be suspended at plants

in Zhejiang by 15-40 days from mid-Nov to Dec. On a net basis,

we believe the environmental requirements would keep a check

on cement production and supply.

Proposal to cease PO32.5R production. Since 2014, there was a

discussion to cease production of lower end PO32.5 and

promote the use of PO42.5 grade cement products nationwide.

Meanwhile, the cessation of low-grade 32.5R cement

production has been primarily adopted in Xinjiang, Ningxia,

Sichuan and part of the Shaanxi markets. If the government

abolishes the use of 32.5 grade cement products, cement

producers will switch to producing P.O42.5 cement products

instead. Based on our calculation, output capacity of low-end

cement accounts for around 50% of the country’s total cement

capacity of 3,332mt p.a. Given that PO42.5 grade cement

products utilise more clinker (each tonne of PO42.5/PC32.5

cement products require 0.77/0.63tonne of clinker respectively),

the upgrade from low-end to high-end cement will increase

overall clinker consumption by 333mt or 10% of the country’s

total cement supply, by 2020 the earliest.

Construction boost yet to reverse slowing consumption

The continued China infrastructure projects rebound,

underpinned by construction of pent-up infrastructure projects

that commenced this quarter, should help to mitigate the

slowing cement consumption from property investment. We

expect China cement consumption to decrease 4.1% y-o-y this

year, before we see a further contraction of 2.0% in 2019. Our

2019 growth projections for infrastructure (+1.6% from 2018),

urbanisation construction (+3.8%), are offset by a decline in

property segment (-8.7%), which reflect our China Property

Team’s latest forecast of a 15-20% decline in the property sales

volume. We estimate infrastructure, urbanisation construction,

and property segments will account for 38%, 24% and 37% of

PRC cement consumption respectively.

Pent-up construction projects from infrastructure investment. On

31 Oct, 2018, the State Council issued guidelines on

maintaining the strength of the infrastructure sector. The

Ministry of Transport of China has issued a three-year action

plan is to build a modern China through transport services

(2018-2020) via the construction of mega infrastructure

facilities. Also, the Government Work Report of 2018 has clearly

pointed out that it will implement the strategy of regional

coordinated development and development of urban

agglomerations such as the Beijing-Tianjin-Hebei Region and the

Yangtze River Delta Economic Zone and Guangdong-Hong

Kong-Macau Greater Bay Area, and continuing construction of

major infrastructure projects in Central and Western China.

Ceasing PO32.5R

low-grade cement

produciton

60%

65%

70%

75%

80%

85%

90%

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Industry Focus

China Cement Sector

China cement demand forecasts for FY17-19E (Mt)

Source: China Year Book, CEIC, DBS HK

China infrastructure investment grew by 3.7% during the first

ten months of 2018, but there was a significant rebound m-o-

m on Oct. The slower than expected investment growth year-

to-date was affected by the government’s clearance of

substandard Public-Private Partnership projects. In Nov-2017,

the Ministry of Finance issued a Notice Concerning

Standardisation of Public-Private Partnership Integrated

Information Platform Project Library Management (Circular

No.92). In the first six months of 2018, local governments had

already issued RMB367.3billion out of total RMB1.35tr special

purpose bonds allowed for this year, to fund major strategic

development programs, which implies that investment growth

momentum will resume and support cement consumption.

Pessimistic investment outlook from property developers.

China residential inventory (covering 10 major tier I & tier II

cities) was 10.2 months in Nov 2018, similar level compared to

10.2 months in December 2015, but higher than 6.8 months in

December 2017, 5.8 months in December 2016 and 8.5-11.5

months during the previous property construction down-cycle

in July-2011 and April-2014. Given that China’s property GFA

(gross floor area) available for sale has continued to decrease,

China’s new starts and new land bank acquired by property

developers is expected to be more conservative next year.

Spotlight on rural urbanisation construction. The rural

revitalisation plan to build and renovate 200,000km of rural

roads based on the Three-year Improvement Action on Rural

Living Environment will further boost demand for rural

development construction. The State Poverty Alleviation and

Redevelopment of shanty towns is of high priority, to improve

the mass transit in concentrated and contiguous areas.

Rising concentration in China’s cement industry

In 2017, China’s top 10 cement producers accounted for

56.7% in terms of clinker capacity. The two China largest

cement producers CNBM and Conch Cement had controlled

73.0% of total clinker capacity in Anhui last year. The target is

for China’s top 10 cement producers to reach 80% by 2020

and the two largest cement producers to control 65% of

clinker production capacity in the ten provinces. In China, after

the merger of CNBM with SINOMA and BBMG with Jidong

Cement, we believe industry concentration will lead to rational

market with sustainable profitability.

Unit : mn tons 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F

Clinker capacit y 1,216 1,437 1,598 1,695 1,765 1,811 1,831 1,851 1,870 1,840 1,810

Cement eq capcit y 2,189 2,587 2,876 3,051 3,177 3,260 3,296 3,332 3,179 3,128 2,987

Cement produciton 1,868 2,063 2,184 2,419 2,492 2,359 2,410 2,331 2,236 2,191 2,147

% growth 10.5% 5.9% 10.8% 3.0% -5.3% 2.2% -3.3% -4.1% -2.0% -2.0%

% ut ilisat ion 85.3% 79.8% 75.9% 79.3% 78.4% 72.4% 73.1% 70.0% 70.3% 70.0% 71.9%

Residential building urban area 612 688 746 826 858 862 897 914 892 814 814

% growth 12.4% 8.5% 10.7% 3.8% 0.5% 4.0% 2.0% -2.4% -8.7% 0.0%

Railway transport 122 111 112 115 123 123 123 124 127 129 131

% growth -8.7% 0.8% 2.6% 7.0% -0.4% 0.1% 1.4% 1.7% 2.2% 1.4%

Road transport 332 336 350 365 383 405 431 484 495 510 519

% growth 1.3% 4.1% 4.2% 5.1% 5.9% 6.3% 12.2% 2.4% 3.0% 1.8%

Other transport 215 221 220 225 226 229 223 200 197 192 189

% growth 2.8% -0.7% 2.3% 0.6% 1.3% -2.7% -10.3% -1.7% -2.3% -1.5%

Power construction 60 53 78 118 172 225 274 242 218 218 188

% growth -10.5% 45.4% 51.8% 46.1% 30.6% 22.0% -11.5% -10.1% 0.0% -13.8%

Rural area FAI 394 398 398 400 400 349 298 248 247 249 251

% growth 1.0% 0.0% 0.4% 0.1% -12.7% -14.6% -17.0% -0.1% 0.8% 0.8%

Other 104 215 246 327 271 99 84 83 42 60 36

% growth 107.3% 14.3% 33.0% -17.1% -63.6% -14.9% -1.2% -48.9% 41.8% -40.7%

Net export 16.2 10.6 12.0 14.5 13.9 15.8 17.8 12.9 9.0 9.0 9.0

% growth -34.3% 13.1% 21.2% -4.3% 13.3% 12.9% -27.7% -30.0% 0.0% 0.0%

Calculated consumption 1,855 2,034 2,162 2,389 2,447 2,308 2,347 2,308 2,227 2,182 2,138

% growth 9.6% 6.3% 10.5% 2.4% -5.7% 1.7% -1.7% -3.5% -2.0% -2.0%

Industry Focus

China Cement Sector

Rising industry concentration in China

Source: Digital Cement, DBS HK

Hong Kong

Guangdong

Hainan

Hubei

HunanJ iangxi

Fujian

Heilongjiang

Inner Mongolia

Hebei

HenanJ iangsu

Shandong

Anhui

Guangxi

Guizhou

Beijing

Tianjin

J ilin

Gansu

Shaanxi

Qinghai

Xinjiang

Tibet

Ningxia

Zhejiang

Yunnan

Liaoning

Shanxi

Sichuan Chongqing

Shanghai

CR9 100%

CR9 65%-75%

CR9 50%-65%

Industry Focus

China Cement Sector

Better price outlook in the South and West

China’s national average cement price had exceeded the peak

in the previous cycle in 2011. We expect a differential cement

price and the performance to be varied according to the

regions, on average stronger in the South than that in the

Northern market.

As a top priority on China government’s agenda, the

construction of Guangdong-Hong Kong-Macau Greater Bay

Area, opening up of the pilot Free Trade Zone in Guangdong

and Hainan, and the construction of the Pan Pearl River Delta

Region, specifically the plan to build an one-hour living circle-

rail transit system and more high-speed rail intercity lines which

to be completed by 2024, would drive the regional demand for

building materials in the medium to long term. In Guangxi, the

construction of Xijiang Economic Belt to integrate into

Guangdong and the Greater Bay Area. Overall, we expect 2%

increase in cement consumption in those areas in 2019,

contrary to the nation’s average decline of 1%.

South China cement price trend


The West China market outlook is stable supported by both

urban property demand and rural demand. For example,

Shaanxi is an important gateway to open the economy in West

China. There are a number of infrastructure projects that have

started construction or are expected to commence, such as the

Xi’an to Yan’an High Speed Railway, several Central Shaanxi

Intercity Railways, the Xi’an to Xianyang South Ring

Expressway, and the reconstruction and extension of Pucheng-

Laoyukou Expressway of the Beijing-Kunming line as well as

the other urban regeneration projects, reservoir, airports and

metros which are all in the pipeline. In Xinjiang, with the

elimination of the use of low grade 32.5R cement since May

2017, which has led to the closure of inefficient facilities, small

production capacities will benefit from the better industry

outlook underpinned by plans to open the economy in the

west.

Capacity comparison

Source: Companies, DBS HK

-40

-20

0

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40

60

80

100

120

140

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100

200

300

400

500

600

Jan-12 Jan-14 Jan-16 Jan-18

RMB/ton

Guangdong (LHS) GD/GX (RHS)

CNBM

%

China Conch

%

China CRC

%

China

Beijing - - - - - -

Tianjin - - - - - -

Hebei 0.7% 0.2% - - - -

Shanxi 0.2% 0.0% - - 8.6% 0.3%

Inner Mongolia 3.8% 0.8% - - - -

North 4.7% 1.0% - - 8.6% 0.3%

Liaoning 0.6% 0.1% - - - -

J ilin 1.7% 0.4% - - - -

Heilongjiang 3.4% 0.7% - - - -

Northeast 5.7% 1.2% - - - -

J iangsu 6.0% 1.3% 1.8% 0.2% - -

Zhejiang 10.0% 2.2% 1.5% 0.2% - -

Anhui 5.0% 1.1% 38.0% 4.4% - -

Fujian 0.4% 0.1% - - 10.7% 0.4%

J iangxi 5.2% 1.1% 5.2% 0.6% - -

Shandong 10.1% 2.2% 0.7% 0.1% - -

East 36.7% 8.0% 47.2% 5.4% 10.7% 0.4%

Henan 4.4% 0.9% - - - -

Hubei - - - - - -

Hunan 6.6% 1.4% 10.1% 1.2% - -

Guangdong 2.4% 0.5% 7.0% 0.8% 27.3% 1.0%

Guangxi 1.6% 0.3% 7.7% 0.9% 40.7% 1.5%

Hainan - - - - 5.0% 0.2%

Cent ral 14.9% 3.3% 24.8% 2.8% 73.0% 2.6%

Chongqing 2.8% 0.6% 3.0% 0.3% - -

Sichuan 9.6% 2.1% 4.1% 0.5% - -

Guizhou 5.7% 1.2% 9.1% 1.0% 2.4% 0.1%

Yunnan 5.1% 1.1% 4.0% 0.5% 5.4% 0.2%

Southwest 23.2% 5.1% 20.1% 2.3% 7.7% 0.3%

Tibet - - - - - -

Shaanxi 0.4% 0.1% 4.9% 0.6% - -

Gansu 5.0% 1.1% 2.6% 0.3% - -

Qinghai 0.7% 0.2% - - - 0.0%

Ningxia 2.2% 0.5% - - - -

Xinjiang 6.3% 1.4% 0.4% 0.0% - -

Northwest 14.7% 3.2% 7.8% 0.9% - -

100.0% 21.8% 100.0% 11.5% 100.0% 3.6%

Industry Focus

China Cement Sector

Benefit from weaker coal price

In 2018, thermal coal prices peaked in February at Rmb765/t

(incl. VAT), and Qinhuangdao (QHD) coal prices started the

year at Rmb702/t (incl. VAT). Coal inventory at ports and plants

is reported to rebound amid lower winter coal consumption.

While China coal mining output normalising and railway

transportation capacity increase, new coal production supply

would generate downward pressure on coal price. Since coal

accounted for 40% of the total cement production cost, lower

coal price provides support to cement product margins.

Qinhuangdao port steam coal price, Shanxi production

Source: Wind, DBS HK

Investment outlook

We prefer China Resources Cement (CRC), on its strong

market position in the South China market. Around 70% of

CRC’s sales revenue is exposed to Guangdong and Guangxi,

and benefiting from the Greater Bay Area development policy.

Going forward, CRC is planning to dispose three cement

subsidiaries located in Shanxi, which would reduce core

earnings by less than 2% in FY19F. Over the medium term,

CRC would benefit from explosive mid-term new growth driver

from its prefabricated construction component business.

For Conch Cement, according to the company’s development

plan, total cement capacity would reach 400mtpa by 2022,

mainly driven by M&As and overseas projects, being the

second largest cement producer in China. Conch as the

industry proxy should move in line with China cement prices.

Conch’s profit contribution from the higher-margin aggregate

business is small. While its low-cost advantage and ample cash

should help to weather industry volatility, its overseas project

investments which are generating low returns, and the group’s

latest reorganization remain uncertain.

China National Building Material (CNBM) is the largest global

cement producer, with total cement & clinker capacity reached

525mtpa and utilisation rate were 71.6%. CNBM has 25% of

the company’s total capacity exposed to North China where is

facing higher price pressure as demand slows. Low asset

turnover and net gearing at ~100% are concerns.

Major operating assumptions


Valuation

Current valuation for cash-rich companies such as CRC and

Conch is trading at 6.0x and 7.1x FY19F PER, respectively,

discount to their historical means of 11.2x and 11.8x, as the

shares had priced in the cement price downturn. We believe

the sector valuation should remain supported as the industry

adopts deeper measures on supply -side reform for a more

sustainable industry growth. We resume coverage on the

sector with BUY on CRC, HOLD on Conch Cement “H” and

prefer Conch Cement “A” which has lower valuation, and

FULLY VALUED rating on CNBM.

Risk factors

Major risk factors include worse-than-expected pull back in

cement price in low season, the government reversing capacity

and production closure policies, weaker-than expected

consumption from property developers and local government

investments, which would pose downside risk to our current

earnings estimates.

0

200

400

600

800

1,000

Dec

-08

Mar-

10

Jun-1

1

Sep-1

2

Dec

-13

Mar-

15

May-

16

Aug-1

7

Nov-

18

5500Kcal RMB/t

F Y16 F Y17 F Y18F F Y19F F Y20F

Conch

Cement Capacity mn tons 313 335 344 344 344

Sales volume mn tons 277 295 300 306 306

Blended ASP Rmb/t 197 247 334 317 317

Gross Profit Rmb/t 64 87 158 143 143

Net gearing % 0 CASH CASH CASH CASH

CRC



Blended ASP Rmb/t 249 297 396 401 401


Net gearing % 42 39 11 CASH CASH

CNBM



Blended ASP Rmb/t 207 256 320 312 312


Net gearing % 163 140 126 111 93

Industry Focus

China Cement Sector

Investment summary

Company Rating PT (HK$) Investment summary

China Resources

Cement (1313 HK)

BUY 9.0 • Strong cement consumption outlook in Guangdong and Guangxi

• Beneficiary of the Greater Bay Area development policy

• Explosive mid-term new growth drivers from its prefabricated construction component

business

• Valuation is undemanding at 6.0x FY19F PER

Conch Cement “A”

(600585 CH)

BUY 37.0* • Proxy to China cement industry in terms of cement price

• Low-cost advantage and ample cash to weather industry volatility

• Overseas project investments are generating low returns, and the group’s latest

reorganization remain uncertain

• Trading at lower valuation

Conch Cement “H”

(914 HK)

HOLD 44.0 • Proxy to China cement industry in terms of cement price

• Low-cost advantage and ample cash to weather industry volatility

• Overseas project investments are generating low returns, and the group’s latest

reorganization remain uncertain

• Valuation has priced in the downcycle with the share's PER trading at below historical

mean

China National

Building Material

(3323 HK)

FULLY

VALUED

5.8 • Largest global cement producer driven by M&As

• Hit by greater cement price pressure in the Northern China

• Net gearing is a concern at ~100%

• Trading at a valuation discount to reflect stretched balance sheet

*Rmb Source: DBS HK

Industry Focus

China Cement Sector

Cement peers’ valuation

# FY18: FY19; FY19: FY20 Source: Thomson Reuters, *DBS HK

Mkt PE PE P/Bk P/Bk

Price Cap 18F 19F 18F 19F 18F 19F

Company Name Code Currency Local$ US$m x x x x x x

HK- listed cement companies

BBMG 'H' 2009 HK HKD 2.5 11,126 5.1 5.2 0.4 0.4 7.5 7.5

China National Building Material 'H'* 3323 HK HKD 5.89 4,043 4.5 5.1 0.6 0.6 5.8 6.0

Asia Cement (China) Hdg. 743 HK HKD 6.1 1,221 3.6 3.3 0.7 0.6 2.2 2.2

Anhui Conch Cement 'H'* 914 HK HKD 40.5 24,538 6.4 7.1 1.8 1.5 3.6 3.5

China Shanshui Cmt.Group 691 HK HKD 2.59 1,441 n.a. n.a. n.a. n.a. n.a. n.a.

China Resources Cement Holdings* 1313 HK HKD 7.23 6,326 6.4 6.0 1.3 1.2 3.7 3.3

China Tian.Gp.Cement 1252 HK HKD 6.43 2,414 n.a. n.a. n.a. n.a. n.a. n.a.

West China Cement 2233 HK HKD 1.21 840 4.0 3.8 0.7 0.6 2.9 2.9

A -share- listed cement companies

Tangshan J idong Cmt.'A' 000401 CH CNY 11.8 2,287 10.9 9.8 1.4 1.2 5.6 5.2

Anhui Conch Cmt. 'A'* 600585 CH CNY 31.47 24,538 5.6 6.2 1.6 1.4 3.1 3.0

Huaxin Cement 'A' 600801 CH CNY 17.85 3,845 5.4 5.0 1.6 1.3 4.0 3.8

China Gezhouba Group 'A' 600068 CH CNY 6.43 4,259 5.8 4.8 0.8 0.7 7.2 6.2

Gansu Qilianshan Cmt.Gp. 'A' 600720 CH CNY 6.85 765 6.8 5.7 0.9 0.8 3.7 3.3

Xinjiang Qingsong Bldg. Mats.& Chm.'A' 600425 CH CNY 3.16 627 n.a. n.a. n.a. n.a. n.a. n.a.

Xinjiang Tianshan Cmt 'A' 000877 CH CNY 7.74 1,168 9.0 7.0 1.0 0.9 n.a. n.a.

Ningxia Blms.Gp.'A' 600449 CH CNY 7.87 541 8.6 7.2 0.8 0.7 n.a. n.a.

A sian- listed cement companies

Holcim Indonesia SMCB IJ IDR 1930 1,018 n.a. n.a. 2.3 2.3 20.5 17.0

Ict.Tunggal Prakarsa INTP IJ IDR 20650 5,230 57.8 43.1 3.2 3.1 26.7 20.9

Semen Indonesia (Persero) SMGR IJ IDR 11250 4,591 26.9 22.7 2.2 2.1 12.3 11.0

Acc ACC IN INR 1445.15 3,827 25.0 20.8 2.7 2.6 11.9 10.4

India Cements# ICEM IN INR 90.95 397 24.8 13.3 0.6 0.5 7.1 5.9

EV /EBITDA

Industry Focus

China Cement Sector

Anhui Conch (914 HK) Forward PE Band

Anhui Conch (914 HK) Forward PB Band

CR Cement (1313 HK) Forward PE Band

CR Cement (1313 HK) Forward PB Band

CNBM (3323 HK) Forward PE Band

CNBM (3323 HK) Forward PB Band

Source: Thomson Reuters, DBS HK

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ed-JS/ sa- CS /DL

BUY(Re-instating coverage)

Last Traded Price( 27 Nov 2018):HK$7.23(HSI : 26,332)

Price Target 12-mth:HK$9.00 (24.5% upside) Analyst Duncan CHAN+852 36684178, [email protected]

What’s New • Strong cement consumption outlook in

Guangdong and Guangxi • Beneficiary of the Greater Bay Area development

policy

• Explosive mid-term new growth driver from its

prefabricated construction component business • Valuation is undemanding at 6.0x FY19F PE; TP of

HK$9.0 based on 7.5x FY19F PER

Price Relative

Forecasts and Valuation FY Dec (HK$m) 2017A 2018F 2019F 2020F Turnover 29,958 39,892 39,697 40,120 EBITDA 7,459 14,274 15,735 16,277 Pre-tax Profit 4,884 11,666 13,199 13,773 Net Profit 3,617 7,634 8,637 9,012 Net Pft (Pre Ex) (core profit) 3,617 7,634 8,637 9,012 Net Profit Gth (Pre-ex) (%) 172.8 111.1 13.1 4.3 EPS (HK$) 0.55 1.13 1.20 1.25 Core EPS (HK$) 0.55 1.13 1.20 1.25 EPS Gth (%) 172.8 104.0 6.1 4.3 Core EPS Gth (%) 172.8 104.0 6.1 4.3 Diluted EPS (HK$) 0.55 1.13 1.20 1.25 DPS (HK$) 0.27 0.55 0.59 0.61 BV Per Share (HK$) 4.64 5.68 5.94 6.57 PE (X) 13.1 6.4 6.0 5.8 CorePE (X) 13.1 6.4 6.0 5.8 P/Cash Flow (X) 7.1 5.7 5.0 4.9 P/Free CF (X) 8.7 7.0 5.8 5.6 EV/EBITDA (X) 7.9 3.7 3.3 2.9 Net Div Yield (%) 3.7 7.7 8.1 8.5 P/Book Value (X) 1.6 1.3 1.2 1.1 Net Debt/Equity (X) 0.4 0.1 CASH CASH ROAE(%) 12.8 22.2 21.3 20.0 Earnings Rev (%): New New Consensus EPS (HK$) 1.18 1.18 Other Broker Recs: B:19 S:1 H:2

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters

Beneficiary of strong construction demand in the South South China’s largest cement producer is diversifying product

portfolio. Around 70% of CRC’s sales revenue is exposed to

Guangdong and Guangxi, and benefiting from the Greater Bay

Area development policy. Over the medium-term, CRC would

benefit from explosive new growth driver from its prefabricated

construction component business, which we have not yet

factored in our earnings estimate. Re-instating BUY.

Where we differ: Our FY18F/19F earnings are 5% below and

5% above consensus estimates. We have factored in the

company’s recent asset disposal, which would reduce core

earnings by less than 2% in FY19F. We expect China Resources

Cement (CRC)’s 4Q18 earnings to reflect upbeat cement prices

in the quarter-to-date and we have assumed FY18F unit GP of

cement & clinker to achieve HK$174/ton up from HK$94.4/ton.

Based on our FCF projection and assumed dividend payout at

49%, the stock offers 8.1% dividend yield.

Solid fundamentals in South China. With the solid downstream

construction demand, CRC’s current inventory is lower than the

same period last year. In 9M18, cement consumption in South

China grew 6.1% y-o-y, outperforming the national average

which recorded a 1.0% y-o-y decline. In 2019, we expect

cement consumption growth in South China to be 2% and is

faster than the national average.

Valuation:

BUY, HK$9.0 TP, pegged to 7.5x FY19F PE, which is at a 35%

discount to the company’s historical average level. We are

positive on the stock as FY19F core earnings is projected to

surge 6.1% and the stock offers 8.1% dividend yield.

Key Risks to Our View:

Worse-than-expected pull-back in cement prices in low season.

At A Glance

Issued Capital (m shrs) 6,983

Mkt Cap (HK$m/US$m) 49,509 / 6,326

Major Shareholders (%)

CRH (Cement) Ltd. 68.6

Free Float (%) 31.4

3m Avg. Daily Val. (US$m) 20.3

ICB Industry: Industrials / Construction & Materials

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Dec-14Aug-15Mar-16Nov-16 Jul-17 Mar-18

China Resources Cement Holdings (LHS)

Relative HSI (RHS)

HK$ Relative Index

DBS Group Research . Equity

28 Nov 2018

China / Hong Kong Company Guide

China Resources Cement Version1|Bloomberg: 1313 HK Equity| Reuters: 1313.HK


Company Guide


CRITICAL FACTORS TO WATCH

Critical Factors

Cement prices in South China. As one of the leading cement

producers in the South China region, around 70% of CRC’s

sales revenue is exposed to Guangdong and Guangxi, and

earnings are highly sensitive to cement selling prices. Our

FY18F/19Fcement price forecasts for South China (blended

average of Guangdong and Guangxi) are HK$396/t and

HK$401/t respectively (versus HK$297/t in FY17). We estimate

that every 1% change in cement prices will swing earnings by

2.9%.

Production cost. Thermal coal, raw materials (mainly limestone)

and electricity accounted for 39%/22%/15% of the company’s

9M18 production cost. It takes 147kg of standard coal to

produce one tonne of clinker. It takes 73.1kWh of electricity to

produce one tonne of cement. We estimate that every 1%

change in thermal coal prices will swing earnings by 1.7%. We

project production cost of cement & clinker for FY18F/FY19F to

be HK$223/t vs HK$202.6/t in FY17, to reflect lower thermal

coal prices in Oct-Nov 2018. The company’s thermal coal

procurement cost had increased to around HK$800/t in the

1Q18, compared to HK$710/t in 4Q17.

Sales volume. As at end-Sep 18, CRC's annualised capacities

for cement, clinker and concrete were 83.3mt, 61.3mt and

39.8m cubic metres (m³) respectively. Utilisation rates were

96.5%, 111.5% and 37.2% respectively during the year. The

company targets FY18F/FY19F cement, clinker and concrete

capacities at 83.3mt/85.3mt, 61.3mt/62.7mt and 36.5m

m³/40.1m m³. Our FY18F/19F cement capacity utilisation rates

are stable at 96%. We estimate that every 1% change in

cement sales volume will swing earnings by 0.8%.

Seasonal trend. Cement consumption in China in general

follows the quarterly seasonality. 1Q is the weakest due to

Chinese New Year holidays, followed by a moderate 2Q as

demand picks up and then incoming typhoon and rainy season

during summer period usually results in weaker 3Q

consumption, while 4Q is the strongest due to demand

recovery from pent up construction projects. For

CRC,1Q/2Q/3Q/4Q make up 20%/26%/24%/30% of full-year

cement consumption.

Sales Volume for Cement&Clinker (Mt)

Sales Volume for concrete (Mn m3)

ASP for Cement&Clinker (HK$/t)

ASP for Concrete (HK$/m3)

Gross Profit for Cement products&Clinker(HK$/t)

Source: Company, DBS HK

Company Guide


Appendix 1: A look at Company's listed history – what drives its share price?

Company share price history

Date Events

1 27-Jun-12 China Resources Cement alerted H1 2012 net profit to decrease.

2 2-Jan-13 China Resources Cement acquired 100% stake in Hainan Wuzhishan Dajiangnan Cement.

3 10-Jul-13 China Resources Cement alerted H1 2013 net profit to be significantly increased.

4 30-Sep-13 China Resources Cement to cooperate with Fujian Energy for strategic development in Fujian Province.

5 20-Dec-13 China Resources Cement entered into strategic cooperation arrangements with CR Bank and CR Trust.

6 14-Jan-14 China Resources Cement alerted net profit to be substantially increased in FY2013.

7 14-Apr-14 China Resources Cement alerted Q1 2014 net profit to be significantly increased.

8 25-Jun-14 China Resources Cement alerted H1 2014 net profit to be significantly increased.

9 9-Oct-14 China Resources Cement alerted 9M 2014 net profit to be substantially increased.

10 13-Jan-16 China Resources Cement alerted net profit to significantly decrease in FY2015.

11 16-Jun-16 China Resources Cement entered into strategic cooperation agreement with Anhui Conch Cement.

12 8-Jul-16 China Resources Cement alerted H1 2016 net profit to significantly decrease.

13 19-Dec-16 China Resources Cement and BBMG entered into strategic co-operation agreement.

14 21-Dec-16 China Resources Cement signed power supply agreement with China Resources Power.

15 10-Mar-17 China Resources Cement alerted Q1 2017 net profit to significantly increase.

16 12-May-17 China Resources Cement alerted H1 2017 net profit to significantly increase.

17 13-Sep-17 China Resources Cement alerted 9M 2017 net profit to significantly increase.

18 5-Jan-18 China Resources Cement alerted net profit to significantly increase in FY2017.

19 9-Mar-18 China Resources Cement alerted Q1 2018 net profit to significantly increase.

20 11-Jun-18 China Resources Cement alerted H1 2018 net profit to significantly increase.

21 12-Jun-18 China Resources Cement to sell 450mn new shares at HK$9.3 per share to no less than six independent placees.

22 18-Sep-18 China Resources Cement alerted 9M 2018 net profit to significantly increase.


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Company Guide


Balance Sheet:

Balance sheet to strengthen as cash flow improves. The

company has revised up its capex guidance for FY18F to

HK$1,588m, up from HK$1,396m a year ago. The company

guides FY19F capex will decrease slightly to HK$1,423m. These

assume there is no M&A. Due to expected strong Op-CF

underpinned by stronger cement profitability, we project free

cash flow to increase to HK$6,987m and HK$9,003m in FY18F

and FY19F respectively, versus HK$5,434m in FY17. We

forecast net gearing in FY18F/FY19F to decline to 11% and net

cash respectively, versus 39% in FY17.

Share Price Drivers:

Cement demand. The national cement price in South China –

(Guangdong/Guangxi account for 70% of CRC’s sales volume)

continues to be upbeat, mainly due to low inventory from

supply discipline. Current cement inventories (as a % of

storage capacity) in South China is 49%, which is 19ppt lower

than the historical average, and at the lowest level compared

to the same period in the past five years (2013-17).

Key Risks:

Price risk. Worse-than-expected pull-back in cement prices in

low season.

Company Background

China Resources Cement (CRC) is an SOE, China’s fourth

largest and South China’s largest cement producer. It also has

associates and JVs in Inner Mongolia, Fujian, Yunnan and

Guangzhou. The company has a cement output capacity of

83.3mt.p.a and clinker output capacity of 61.3mt.p.a and

36.5mn m3 at end-Sep 2018.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


Company Guide


Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F


84.9 83.8 86.0 84.5 84.5


12.4 13.5 13.5 13.5 13.5


249.0 297.0 396.4 400.7 405.1


366.0 376.0 432.4 432.4 432.4


67.5 94.4 173.6 180.2 186.8


Segmental Breakdown (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenues (HK$ m) Cement 20,173 22,861 31,574 31,950 32,344 Clinker 940 2,040 2,498 1,928 1,957 Concrete 4,535 5,060 5,819 5,819 5,819

Total 25,648 29,961 39,892 39,697 40,120

Gross profit (HK$ m) Cement 5,568 7,407 13,356 13,515 13,682 Clinker 120 530 924 713 724 Concrete 1,333 1,306 2,027 1,913 1,913

Total 7,021 9,243 16,307 16,141 16,319

Gross profit Margins (%) Cement 27.6 32.4 42.3 42.3 42.3 Clinker 12.8 26.0 37.0 37.0 37.0 Concrete 29.4 25.8 34.8 32.9 32.9

Total 27.4 30.8 40.9 40.7 40.7


Company Guide


Income Statement (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 25,647 29,958 39,892 39,697 40,120

Cost of Goods Sold (18,622) (20,728) (22,936) (22,545) (22,358)

Gross Profit 7,025 9,230 16,955 17,153 17,762

Other Opng (Exp)/Inc (3,977) (4,459) (5,146) (3,970) (4,012)

Operating Profit 3,048 4,771 11,809 13,183 13,750

Other Non Opg (Exp)/Inc (148) 652 150 149 151

Associates & JV Inc (50) 99 364 485 491

Net Interest (Exp)/Inc (692) (638) (657) (618) (618)

Dividend Income 0 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0 0

Pre-tax Profit 2,158 4,884 11,666 13,199 13,773

Tax (897) (1,291) (4,083) (4,620) (4,820)

Minority Interest 64 24 51 58 60

Preference Dividend 0 0 0 0 0

Net Profit 1,326 3,617 7,634 8,637 9,012

Net Profit before Except. 1,326 3,617 7,634 8,637 9,012

EBITDA 4,753 7,459 14,274 15,735 16,277

Growth

Revenue Gth (%) N/A 16.8 33.2 (0.5) 1.1

EBITDA Gth (%) N/A 56.9 91.4 10.2 3.4

Opg Profit Gth (%) N/A 56.5 147.5 11.6 4.3

Net Profit Gth (%) N/A 172.8 111.1 13.1 4.3

Margins & Ratio

Gross Margins (%) 27.4 30.8 42.5 43.2 44.3

Opg Profit Margin (%) 11.9 15.9 29.6 33.2 34.3

Net Profit Margin (%) 5.2 12.1 19.1 21.8 22.5

ROAE (%) N/A 12.8 22.2 21.3 20.0

ROA (%) N/A 6.7 12.8 13.3 13.0

ROCE (%) N/A 7.9 15.1 15.3 14.8

Div Payout Ratio (%) 44.3 48.8 49.0 49.0 49.0

Net Interest Cover (x) 4.4 7.5 18.0 21.3 22.2


Interim Income Statement (HK$ m)

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018

Revenue 11,316 14,332 13,188 16,770 18,514


Gross Profit 2,697 4,328 3,896 5,335 7,295

Other Oper. (Exp)/Inc (1,647) (2,330) (1,720) (2,740) (1,715)


Other Non Opg (Exp)/Inc (34) (113) 290 363 360

Associates & JV Inc (45) (5) 34 65 152



Pre-tax Profit 617 1,541 2,191 2,693 5,746

Tax (287) (610) (573) (718) (1,795)

Minority Interest 35 29 27 (3) (2)

Net Profit 366 960 1,644 1,972 3,948

Net profit bef Except. 366 960 1,644 1,972 3,948

Growth

Revenue Gth (%) N/A N/A 16.6 17.0 40.4

Opg Profit Gth (%) N/A N/A 107.3 29.9 156.5

Net Profit Gth (%) N/A N/A 349.3 105.5 140.1

Margins

Gross Margins (%) 23.8 30.2 29.5 31.8 39.4

Opg Profit Margins (%) 9.3 13.9 16.5 15.5 30.1

Net Profit Margins (%) 3.2 6.7 12.5 11.8 21.3


Company Guide


Balance Sheet (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 29,784 30,903 30,552 30,035 29,549

Invts in Associates & JVs 6,697 6,961 6,961 6,961 6,961

Other LT Assets 6,602 6,768 6,768 6,768 6,768

Cash & ST Invts 3,160 5,385 10,812 15,583 20,502

Inventory 1,943 1,717 2,025 1,991 1,974

Debtors 3,473 4,275 5,387 5,365 5,413

Other Current Assets 498 518 518 518 518

Total Assets 52,157 56,527 63,024 67,220 71,685

ST Debt 3,230 6,572 5,806 5,806 5,806

Creditors 7,592 8,341 8,815 8,665 8,593

Other Current Liab 3,995 444 444 444 444

LT Debt 10,970 10,579 9,346 9,346 9,346

Other LT Liabilities 118 108 108 108 108

Shareholder’s Equity 26,007 30,309 38,383 42,788 47,384

Minority Interests 245 173 123 65 5

Total Cap. & Liab. 52,157 56,527 63,024 67,220 71,685

Non-Cash Wkg. Capital (5,673) (2,275) (1,329) (1,235) (1,132)

Net Cash/(Debt) (11,039) (11,767) (4,339) 431 5,350

Debtors Turn (avg days) 32.9 30.6 30.0 32.9 33.9

Creditors Turn (avg days) 44.4 39.7 39.3 43.4 44.4

Inventory Turn (avg days) 34.4 32.2 30.7 33.4 34.4

Asset Turnover (x) NM 0.6 0.7 0.6 0.6

Current Ratio (x) 0.6 0.8 1.2 1.6 1.9

Quick Ratio (x) 0.4 0.6 1.1 1.4 1.7

Net Debt/Equity (X) 0.4 0.4 0.1 CASH CASH

Net Debt/Equity ex MI (X) 0.4 0.4 0.1 CASH CASH

Capex to Debt (%) 12.9 6.9 10.6 9.2 9.2

Z-Score (X) 2.8 3.0 3.0 3.0 3.0


Cash Flow Statement (HK$ m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 2,158 4,884 11,666 13,199 13,773

Dep. & Amort. 1,902 1,936 1,950 1,917 1,886

Tax Paid (1,414) (1,789) (4,740) (5,238) (5,439)

Assoc. & JV Inc/(loss) 50 (99) 0 0 0

(Pft)/ Loss on disposal of FAs 0 0 0 0 0

Chg in Wkg.Cap. (170) 849 (946) (94) (104)

Other Operating CF 1,585 831 657 618 618

Net Operating CF 4,112 6,613 8,587 10,403 10,735

Capital Exp.(net) (1,830) (1,179) (1,600) (1,400) (1,400)

Other Invts.(net) 41 22 0 0 0

Invts in Assoc. & JV (14) (199) 0 0 0

Div from Assoc & JV 0 0 0 0 0

Other Investing CF 131 (532) 0 0 0

Net Investing CF (1,671) (1,888) (1,600) (1,400) (1,400)

Div Paid (229) (1,241) (3,741) (4,232) (4,416)

Chg in Gross Debt (640) 1,683 (2,000) 0 0

Capital Issues 0 0 0 0 0

Other Financing CF (166) (3,233) 4,181 0 0

Net Financing CF (1,035) (2,792) (1,560) (4,232) (4,416)

Currency Adjustments 0 0 0 0 0

Chg in Cash 1,406 1,933 5,427 4,771 4,919

Opg CFPS (HK$) 0.66 0.88 1.41 1.46 1.50

Free CFPS (HK$) 0.35 0.83 1.03 1.25 1.30


ed-JS/ sa- CS /DL

H: HOLD(Re-instating coverage)

Last Traded Price (H)( 27 Nov 2018):HK$40.50(HSI : 26,332) Price Target 12-mth (H):HK$44.00 (8.6% upside)

A: BUY(Re-instating coverage)

Last Traded Price (A)( 27 Nov 2018):RMB31.47(CSI300 Index :

3,137)

Price Target 12-mth (A):RMB37.00 (17.6% upside)

Analyst Duncan CHAN+852 36684178, [email protected]

What’s New • Proxy to China’s cement industry

• Low-cost advantage and ample cash to weather

industry volatility

• Overseas project investments are generating low

returns, and the group’s latest reorganization

remain uncertain

• Valuation has priced in the downcycle with the

share’s PER trading at below historical mean

Price Relative

Forecasts and Valuation(H Shares) FY Dec (RMBm) 2017A 2018F 2019F 2020F Turnover 75,311 102,74

599,643 99,643

EBITDA 26,792 46,845 43,355 42,050 Pre-tax Profit 21,275 41,077 37,301 35,866 Net Profit 15,899 29,731 26,997 25,959 Net Pft (Pre Ex) (core profit) 15,899 29,731 26,997 25,959 Net Profit Gth (Pre-ex) (%) 85.4 87.0 (9.2) (3.8) EPS (RMB) 3.00 5.61 5.09 4.90 EPS (HK$) 3.38 6.32 5.74 5.51 Core EPS (RMB) 3.00 5.61 5.09 4.90 Core EPS (HK$) 3.38 6.32 5.74 5.51 EPS Gth (%) 85.4 87.0 (9.2) (3.8) Core EPS Gth (%) 85.4 87.0 (9.2) (3.8) Diluted EPS (HK$) 3.38 6.32 5.74 5.51 DPS (HK$) 1.35 2.53 2.29 2.21 BV Per Share (HK$) 18.94 22.73 26.17 29.48 PE (X) 12.0 6.4 7.1 7.3 CorePE (X) 12.0 6.4 7.1 7.3 P/Cash Flow (X) 11.4 5.5 5.6 5.9 P/Free CF (X) 14.3 6.8 7.1 7.6 EV/EBITDA (X) 6.8 3.6 3.5 3.3 Net Div Yield (%) 3.3 6.2 5.7 5.5 P/Book Value (X) 2.1 1.8 1.5 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE(%) 19.2 30.3 23.5 19.8 Earnings Rev (%): New New Consensus EPS (RMB) 5.28 5.20 Other Broker Recs: B:20 S:1 H:3 Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters

Proxy to China’s cement industry

Re-instating coverage with HOLD. Conch Cement is China’s

second largest cement producer. Conch Cement is the

industry proxy and its share price moves in line with China

cement prices. While Conch’s low-cost advantage and ample

cash should help to weather industry volatility, we believe the

share price to be clouded by its overseas project investments

which are generating low returns currently, and the

uncertainty on the group’s latest reorganization.

Where we differ: Our FY18F/FY19F earnings are 6% above

and in line with consensus estimates for the corresponding

period. We estimate Conch’s net profit to register flat

earnings growth during FY18F, assuming unit GP of cement &

clinker to reach Rmb158/t up from Rmb87.3/t. Contribution

from the higher-margin aggregate business is still minimal at

1.4% of total GP in FY18F/FY19F.

Net cash. With the company’s RM22bn net cash on hand as

of end Sep 2018, while one-third of the full year capex plan of

RMB6bn spent during the first six months, we expect a lower

future capex requirements, we believe Conch’s strong balance

sheet can weather the industry fluctuations and opt for M&As

expansion when opportunities arise.

Valuation:

Our H-share TP is set at HK$44.0, pegged at a 35% discount

to Conch’s mid-cycle valuation of 7.7x PE. Conch Cement is

trading at 7.1x FY19F PE. Our A-share TP is set at HK$37.0,

pegged to 7.3x PE, reinstating BUY.


Worse-than-expected pull-back in cement prices in 1Q19.

At A Glance

Issued Capital - H shares (m shs) 1,300

- Non H shrs (m shs) 4,000

H shs as a % of Total 25

Total Mkt Cap (HK$m/US$m) 192,025 / 24,538


Anhui Conch Group Co., Ltd. 48.2

Major H Shareholders (As % of H shares) 0

Schroder Investment Management (HK) Ltd. 9.9

H Shares-Free Float (%) 90.1



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Anhui Conch Cement 'H' (LHS)Relative HSI (RHS)

HK$ Relative Index

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ANHUI CONCH CMT. 'A' (LHS)Relative CSI300 (RHS)

RMB Relative Index

DBS Group Research . Equity 28 Nov 2018


Anhui Conch Cement Version 1 | Bloomberg: 914 HK Equity| 600585 CH Equity| Reuters: 0914.HK| 600585.SS


Company Guide

Anhui Conch Cement


Critical Factors

Supply-side drivers to drive continued cement price. We expect

China’s cement consumption to decrease 4.1% this year,

followed by a decrease of 2.0% y-o-y in 2019. This is to reflect

our 2019 growth forecast for infrastructure (+1.6%from 2018),

urbanisation construction (+3.8%), are offset by lower growth

in property segment (-8.7%). We estimate infrastructure

segment, urbanisation construction and property segment to

account for 38%, 24% and 37% of PRC cement consumption

respectively. Despite slowing consumption demand, we expect

China cement price would receive support amid existing

production discipline.

Sales volume. As at end-Sep 18, Conch’s capacities for cement,

clinker and concrete were 344mt, 248mt and 30.9m cubic

metres (m3). Conch plans total cement capacity to reach 400mt

by 2022. In FY18F, we assume sales volume is 300mt versus

295mt in FY17. We estimate that every 1% change in sales

volume will swing earnings by 0.9%.

Cement prices. Anhui Conch, being one of the largest cement

producers in China, has 47%/25%/20% of the company’s

clinker capcaity exposed to East, Central and South China

respectively. In FY18F, we are projecting Conch’s blended

cement & clinker ASP to increase to Rmb334/t versus

Rmb247.1/t in FY17. We estimate that every 1% change in

blended cement & clinker ASP will swing earnings by 2.6%.

Production cost. Coal & electricity account for around

40%/20% of Conch’s production cost respectively. In 2018,

thermal coal prices peaked in February at Rmb765/t (incl. VAT),

and Qinghuangdao (QHD) coal prices started the year at

Rmb702/t (incl. VAT). Our FY18F unit production cost of Conch

is Rmb176/t versus Rmb159.8/t for FY17. We estimate that

every 1% change in thermal coal prices will swing earnings by

2.7%.

Aggregates business. The company’s aggregates business has

scaled up since 2017. Aggregates is a by-product of limestone

stripping and has a high magnesium content, which is the

feedstock of concrete products. Owing to the Chinese

government’s stricter environmental inspection on limestone

quarries, small-sized quarries have been effectively shut down.

We foresee the tightened environmental policy to remain

intact, which will help to sustain the high GP margins of

aggregates. Conch targets to expand output capacity of

aggregates to 100mt by end-2020 from 25mt as at end-2016.


ASP for Cement&Clinker (RMB/t)

Gross Profit for Cement products&Clinker(RMB/t)

Sales Volume for Aggregates (Mt)

Gross Profit for Aggregates (RMB/t)


277295 300 306 306

0

44

88

132

177

221

265

309

2016A 2017A 2018F 2019F 2020F

196.6

247.1

333.6316.9 316.9

0

68

136

204

272

340

2016A 2017A 2018F 2019F 2020F

64.4

87.3

157.8

142.9 142.9

0

32

64

97

129

161

2016A 2017A 2018F 2019F 2020F

0

20

27 27

37

0.0

7.5

15.0

22.5

30.1

37.6

2016A 2017A 2018F 2019F 2020F

0

22.8

25.3

22.8

16.4

0

5

10

15

20

25

30

2016A 2017A 2018F 2019F 2020F

Company Guide

Anhui Conch Cement



Date Events

1 15-Jan-14 Anhui Conch Cement alerted net profit to increase by approximately 50% for FY2013.

2 28-Feb-14 Anhui Conch Cement acquired 5% stake in Tangshan Jidong Cement to 18.55%.

3 2-Jul-14 Anhui Conch Cement alerted net profit for the H1 2014 to increase by above 90%.

4 11-Jun-15 Anhui Conch Cement reduced stake in Tangshan Jidong Cement to 14.84% from 19.84%.

5 15-Jun-15 Anhui Conch Cement reduced stake in Xinjiang Qingsong Building Materials and Chemicals to 13.16% from 18.17%.

6 28-Nov-15 Anhui Conch Cement plan to sell four wholly owned units to West China Cement.

7 16-Jun-16 Anhui Conch Cement and China Resources Cement entered into a strategic co-operation agreement.

8 1-Jul-16 Anhui Conch Cement terminated stake transaction plan with West China Cement.

9 16-Feb-17 Anhui Conch Cement reduced stake in Xinjiang Qingsong Building Materials and Chemicals to 8.16% from 13.16%.

10 1-Mar-17 Anhui Conch Cement cut 3.17% stake in Xinjiang Qingsong Building Materials.

11 25-Jul-17 Anhui Conch Cement alerted net profit for the H1 2017 to increase by 90%-110%.

12 5-Jan-18 Anhui Conch Cement alerted net profit for FY2017 to be within range of RMB5.97-7.68bn.

13 9-Apr-18 Anhui Conch Cement alerted net profit for the Q1 2018 to increase by 120%.

14 12-Jun-18 Anhui Conch Cement alerted net profit for the H1 2018 to increase by 80%-100%.


7

10 11

12

13

14

0.0

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60.0

Dec

-13

Feb-1

4

Apr-

14

Jun-1

4

Aug-1

4

Oct

-14

Dec

-14

Feb-1

5

Apr-

15

Jun-1

5

Aug-1

5

Oct

-15

Dec

-15

Feb-1

6

Apr-

16

Jun-1

6

Aug-1

6

Oct

-16

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7

Apr-

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Jun-1

7

Aug-1

7

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8

Apr-

18

Jun-1

8

Aug-1

8

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HK$

2

5

8

94

1

36

Company Guide

Anhui Conch Cement

Balance Sheet:

Balance sheet to strengthen with FCF yield of 14-15% for

FY18F/FY19F. Anhui Conch has a strong balance sheet and net

cash as of end Sep 18. Our FY18F/19F Op-CF are Rmb34bn

and Rmb35bn respectively, driven by stronger cement business.

This compares to capex of Rmb6.0bn. Due to strong cash

position, Conch Cement is capable to maintain dividend payout

ratio at 40%.


Cement demand. The national cement price in East and Central

China (accounting for 72% of Conch’s sales volume) continues

to be upbeat, mainly due to low inventory from supply

discipline. Current cement inventories (as a % of storage

capacity) in East, Central & South China are 44%, 47% and

49% respectively, which are 19-24ppt lower than the historical

average, and the lowest levels compared to the same period in

the past five years (2013-17).

Key Risks:

Demand risk. Worse-than-expected pull-back in cement prices

in low season.

Company Background

Anhui province government-owned enterprise, Anhui Conch

(Conch) is China’s second largest cement producer with

output capacity of 248mt of clinker and 344mt of cement and

30.9 m3 as of end-Sep 18. It has capacity exposure to East

China (47%), Central China (25%), South West China (20%)

and Northwest (8%). Conch is China’s largest cement

exporter. The company had 28.9mt output capacity of

aggregates as of end-Sep 2018. It is expanding its cement

capacity in Indonesia and Cambodia.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.00

0.05

0.10

0.15

0.20

0.25

2017A 2018F 2019F 2020F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

2016A 2017A 2018F 2019F 2020F

Capital Expenditure (-)

RMB m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2017A 2018F 2019F 2020F

Company Guide

Anhui Conch Cement

Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F


277.0 295.0 300.0 306.0 306.0

ASP for Cement&Clinker (RMB/t)

196.6 247.1 333.6 316.9 316.9

Gross Profit for Cement products&Clinker(RMB/t)

64.4 87.3 157.8 142.9 142.9

Sales Volume for Aggregates (Mt)

N/A 19.7 26.8 26.8 37.2

Gross Profit for Aggregates (RMB/t)

N/A 22.8 25.3 22.8 16.4


Segmental Breakdown (RMB m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenues (RMB m) Cement 54,468 72,892 100,072 96,970 96,970 Aggregrates N/A N/A 953 953 953

Total 55,932 75,311 102,745 99,643 99,643

Gross profit (RMB m) Cement 17,536 25,522 47,351 43,732 43,732 Aggregrates N/A N/A 677 610 610

Total 17,536 25,522 48,028 44,343 44,342

Gross profit Margins (%) Cement 31.4 33.9 47.3 45.1 45.1 Aggregrates N/A N/A 71.0 64.0 64.0

Total 31.4 33.9 46.7 44.5 44.5


Company Guide

Anhui Conch Cement

Income Statement (RMB m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 55,932 75,311 102,745 99,643 99,643


Gross Profit 17,536 25,522 48,028 44,342 44,342

Other Opng (Exp)/Inc (6,806) (7,042) (9,608) (9,318) (11,042)


Other Non Opg (Exp)/Inc 1,859 3,359 2,962 2,726 3,016

Associates & JV Inc (97) 120 420 420 420


Dividend Income 0 0 0 0 0


Pre-tax Profit 11,699 21,275 41,077 37,301 35,866

Tax (2,703) (4,800) (10,269) (9,325) (8,966)

Minority Interest (423) (576) (1,077) (978) (941)

Preference Dividend 0 0 0 0 0

Net Profit 8,574 15,899 29,731 26,997 25,959

Net Profit before Except. 8,574 15,899 29,731 26,997 25,959

EBITDA 17,244 26,792 46,845 43,355 42,050

Growth

Revenue Gth (%) N/A 34.6 36.4 (3.0) 0.0

EBITDA Gth (%) N/A 55.4 74.8 (7.5) (3.0)

Opg Profit Gth (%) N/A 72.2 107.9 (8.8) (4.9)

Net Profit Gth (%) N/A 85.4 87.0 (9.2) (3.8)

Margins & Ratio

Gross Margins (%) 31.4 33.9 46.7 44.5 44.5

Opg Profit Margin (%) 19.2 24.5 37.4 35.2 33.4

Net Profit Margin (%) 15.3 21.1 28.9 27.1 26.1

ROAE (%) N/A 19.2 30.3 23.5 19.8

ROA (%) N/A 13.7 22.6 18.0 15.5

ROCE (%) N/A 14.1 24.8 19.6 16.5

Div Payout Ratio (%) 30.9 40.0 40.0 40.0 40.0

Net Interest Cover (x) 13.5 27.0 53.1 40.3 38.3


Interim Income Statement (RMB m)

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018

Revenue 23,973 31,959 31,908 43,403 45,742


Gross Profit 7,183 10,353 9,890 15,632 19,565

Other Oper. (Exp)/Inc (2,949) (3,857) (2,958) (4,084) (3,291)


Other Non Opg (Exp)/Inc 814 1,044 2,644 715 1

Associates & JV Inc (68) (29) (1) 121 210



Pre-tax Profit 4,527 7,173 9,228 12,047 16,233

Tax (1,064) (1,639) (2,147) (2,653) (3,876)

Minority Interest (104) (319) (342) (234) (369)

Net Profit 3,359 5,215 6,739 9,160 11,988

Net profit bef Except. 3,359 5,215 6,739 9,160 11,988

Growth

Revenue Gth (%) N/A N/A 33.1 35.8 43.4

Opg Profit Gth (%) N/A N/A 63.7 77.8 134.8

Net Profit Gth (%) N/A N/A 100.6 75.6 77.9

Margins

Gross Margins (%) 30.0 32.4 31.0 36.0 42.8

Opg Profit Margins (%) 17.7 20.3 21.7 26.6 35.6

Net Profit Margins (%) 14.0 16.3 21.1 21.1 26.2


Company Guide

Anhui Conch Cement

Balance Sheet (RMB m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 64,661 63,294 65,250 67,066 68,752

Invts in Associates & JVs 3,315 2,791 2,791 2,791 2,791

Other LT Assets 11,954 10,034 10,034 10,034 10,034

Cash & ST Invts 15,586 24,760 40,717 56,692 71,523

Inventory 4,549 4,705 5,085 5,139 5,139

Debtors 9,147 16,340 17,335 16,813 16,813

Other Current Assets 302 220 220 220 219

Total Assets 109,514 122,143 141,431 158,754 175,270

ST Debt 4,538 5,620 5,620 5,620 5,620

Creditors 11,656 13,391 13,764 13,910 13,910

Other Current Liab 855 2,103 2,103 2,103 2,103

LT Debt 11,443 8,359 8,359 8,359 8,359

Other LT Liabilities 1,044 980 980 980 980

Shareholder’s Equity 76,309 89,150 106,988 123,187 138,762

Minority Interests 3,669 2,539 3,617 4,595 5,536

Total Cap. & Liab. 109,514 122,143 141,431 158,754 175,270

Non-Cash Wkg. Capital 1,486 5,770 6,773 6,158 6,157

Net Cash/(Debt) (395) 10,781 26,738 42,713 57,544

Debtors Turn (avg days) 52.6 61.4 59.6 62.4 61.4

Creditors Turn (avg days) 109.5 91.8 90.6 91.3 91.8

Inventory Turn (avg days) 41.8 33.9 33.9 33.9 33.9

Asset Turnover (x) NM 0.7 0.8 0.7 0.6

Current Ratio (x) 1.7 2.2 2.9 3.6 4.3

Quick Ratio (x) 1.5 1.9 2.7 3.4 4.1

Net Debt/Equity (X) 0.0 CASH CASH CASH CASH

Net Debt/Equity ex MI (X) 0.0 CASH CASH CASH CASH

Capex to Debt (%) 28.7 23.9 50.1 50.1 50.1

Z-Score (X) 5.4 5.5 5.5 5.5 5.5


Cash Flow Statement (RMB m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 11,699 21,275 41,077 37,301 35,866

Dep. & Amort. 4,753 4,833 5,043 5,184 5,314

Tax Paid (3,285) (4,332) (10,269) (9,325) (8,966)

Assoc. & JV Inc/(loss) (97) 120 420 420 420

(Pft)/ Loss on disposal of FAs 0 0 0 0 0

Chg in Wkg.Cap. (2,178) (4,782) (1,002) 614 0

Other Operating CF 1,299 (446) (420) (420) (420)

Net Operating CF 12,191 16,668 34,849 33,774 32,214

Capital Exp.(net) (4,581) (3,334) (7,000) (7,000) (7,000)

Other Invts.(net) 705 4,801 0 0 0

Invts in Assoc. & JV (1,729) (5,212) 0 0 0

Div from Assoc & JV 0 0 0 0 1

Other Investing CF 1,053 (1,458) 0 0 (1)

Net Investing CF (4,552) (5,203) (7,000) (7,000) (7,000)

Div Paid (2,559) (2,782) (11,892) (10,799) (10,383)

Chg in Gross Debt (3,538) (2,124) 0 0 0

Capital Issues 0 0 0 0 0

Other Financing CF (48) (1,898) 0 0 0

Net Financing CF (6,145) (6,804) (11,892) (10,799) (10,383)

Currency Adjustments 0 0 0 0 0

Chg in Cash 1,494 4,661 15,957 15,975 14,830

Opg CFPS (RMB) 2.71 4.05 6.77 6.26 6.08

Free CFPS (RMB) 1.44 2.52 5.26 5.05 4.76


ed-JS/ sa- CS /DL

FULLY VALUED (Re-instating coverage)

Last Traded Price ( 27 Nov 2018):HK$5.89(HSI : 26,332)

Price Target 12-mth:HK$5.80 (1.5% downside)

Analyst Duncan CHAN+852 36684178, [email protected]

What’s New • Largest global cement producer driven by M&As

• Hit by greater cement price pressure in the

Northern China

• Net gearing is a concern at ~100%

• Trading at a valuation discount to reflect stretched

balance sheet; FULLY VALUED; TP HK$5.8

Price Relative

Forecasts and Valuation FY Dec (RMBm) 2017A 2018F 2019F 2020F Turnover 183,368 207,649 204,584 204,584 EBITDA 32,631 49,591 48,123 46,503 Pre-tax Profit 14,005 27,777 24,387 23,027 Net Profit 4,924 9,856 8,653 8,170 Net Pft (Pre Ex) (core profit) 4,924 9,856 8,653 8,170 Net Profit Gth (Pre-ex) (%) 206.0 100.2 (12.2) (5.6) EPS (RMB) 0.58 1.17 1.03 0.97 EPS (HK$) 0.66 1.32 1.16 1.09 Core EPS (RMB) 0.58 1.17 1.03 0.97 Core EPS (HK$) 0.66 1.32 1.16 1.09 EPS Gth (%) 206.0 100.2 (12.2) (5.6) Core EPS Gth (%) 206.0 100.2 (12.2) (5.6) Diluted EPS (HK$) 0.66 1.32 1.16 1.09 DPS (HK$) 0.00 0.60 0.52 0.49 BV Per Share (HK$) 8.60 9.32 9.96 10.55 PE (X) 9.0 4.5 5.1 5.4 CorePE (X) 9.0 4.5 5.1 5.4 P/Cash Flow (X) 4.5 2.0 1.5 1.6 P/Free CF (X) 2.9 12.8 4.1 2.4 EV/EBITDA (X) 8.6 5.8 6.0 6.1 Net Div Yield (%) 0.0 10.1 8.9 8.4 P/Book Value (X) 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 1.4 1.3 1.1 0.9 ROAE(%) 8.0 14.7 12.0 10.6

Earnings Rev (%): New New Consensus EPS (RMB) 1.12 1.12 Other Broker Recs: B:14 S:3 H:5

Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters

Concerns over high debt level

Reinstating coverage with FULLY VALUED recommendation.

CNBM has become the largest cement producer in China

and global market since the completion of merger of

SINOMA this year. However, the company’s average

capacity utilisation rate were lower than peers average at

only 71.6%. We expect CNBM’s unit GP of cement & clinker

to reach Rmb115/t in FY18F up from Rmb55.3/t in FY17,

which was the lowest as compared to CRC and Conch. Low

asset turnover and high net gearing ratio are concerns.

Where we differ: Our FY19F earnings is 10% below

consensus estimates as we are more conservative on the

cement price in the Northern China market. Based on the

company’s capex plan, CNBM’s net debt equity ratio is likely

to be over 100% at end 2020. We are concerned about the

company’s low asset turnover, while interest expense will

continue to drag overall earnings profitability.

Potential risks. Shandong account for c.10% of CNBM’s

clinker output capacity. The plan to address the air pollution

problem in China’s “26+2” cities will be implemented

during the winter heating season (from Nov-2018 to Mar-

2019). However, the province announced steps to raise

production during winter for companies engaged in

coordinated solid waste projects. Therefore, we expect

potential risk on cement price is emerging accordingly.

Valuation:

TP at HK$5.8, based on 5.0x FY19F PE, at par to CNBM’s

trough valuation and a discount to both CRC and Conch

Cement.


Better-than-expected cement prices support in 1Q19.

At A Glance

Issued Capital (m shrs) 3,869

- Non H shrs (m shs) 1,530

Mkt Cap (HK$m/US$m) 31,638 / 4,043


Nil 0

Free Float (%) 100.0



020406080100120

0.02.04.06.08.0

10.012.0

Dec-14Aug-15Mar-16Nov-16 Jul-17 Mar-18

China National Building Material 'H' (LHS)

Relative HSI (RHS)

HK$ Relative Index

DBS Group Research . Equity 28 Nov 2018


China National Building Material Version1|Bloomberg: 3323 HK Equity| Reuters: 3323.HK


Company Guide

China National Building Material


Critical Factors

Supply-side drivers to support cement price. We expect China’s

cement consumption to decrease 4.1% this year, followed by a

decrease of 2.0% y-o-y in 2019. This is to reflect our 2019

growth forecast for infrastructure (+1.6% from 2018),

urbanisation construction (+3.8%), are offset by lower growth

in property segment (-8.7%). We estimate infrastructure

segment, urbanisation construction and property segment to

account for 38%, 24% and 37% of PRC cement consumption

respectively. Despite slowing consumption demand, we expect

China cement price would receive support amid existing

production discipline.

Cement prices. CNBM, being the largest cement producer in

China, has 37%/23%/15%/25% of its clinker capacity exposed

to East, Southwest, Central and North China. In FY18F, we are

projecting CNBM’s blended cement & clinker ASP to increase

to Rmb320/t versus Rmb256.0/t in FY17. We estimate every

1% change in blended cement & clinker ASP will increase net

profit by 4.1%.

Sales volume. As at end-Sep 18, CNBM’s annualized capacities

for cement and clinker were 525mt – including 413mt pre-

merger CNBM and 112mt from SINOMA. In FY18F, we assume

sales volume unchanged at 376mt. We estimate every 1%

change in sales volume will swing earnings by 1.0%.

Production cost. Fuel & power, raw materials (mainly limestone,

gypsum etc.) account for around 60%/20% of the company’s

production cost. Our FY18F unit production cost of CNBM is

Rmb206/t versus Rmb205.0/t in FY17. We estimate that every

1% change in thermal coal prices will swing earnings by 2.6%.

Finance cost. CNBM would suffer from rising interest cost. We

expect every 25bpincrease in finance cost will erode net profit

by 2.2%.







376 377 377 377 377

0

54

109

163

217

272

326

381

2016A 2017A 2018F 2019F 2020F

81.2

90.4 90.4 90.4 90.4

0.0

18.4

36.9

55.3

73.8

92.2

2016A 2017A 2018F 2019F 2020F

206.6

256.0

320.5 312.3 312.3

0

65

131

196

261

327

2016A 2017A 2018F 2019F 2020F

283

342 342 342 342

0

69

138

207

276

345

2016A 2017A 2018F 2019F 2020F

44

55

115109

105

0

20

40

60

80

100

120

140

2016A 2017A 2018F 2019F 2020F

Company Guide




Date Events

1 9-Sep-14 China fined units of Jilin Yatai Group, CNBM and Tangshan Jidong Cement for price fixing, according to Reuters.

2 29-Sep-14 CNBM's stake in Beijing New Building Materials down to 45.2% from 52.4%.

3 13-Oct-15 Beijing New Building Materials entered deal with Taishan Gypsum. Both will remain as subsidiaries of CNBM.

4 21-Jul-16 CNBM issued profit warning for the H1 2016 to decrease very substantially.

5 18-Jan-17 CNBM entered deals with members of Sinoma.

6 22-Jun-17 CNBM and Taishan Gypsum agreed to pay Lennar in full settlement of the gypsum board litigation in US.

7 14-Jul-17 CNBM alerted H1 2017 net profit to increase substantially.

8 8-Sep-17 CNBM and Sinoma entered into merger agreement at 1 Sinoma share to exchange for 0.85 CNBM share.

9 12-Sep-17 CNBM directly hold 39.7% stake in Sinoma International Engineering from 0%.

10 6-Nov-17 Fair Trade Commission in South Korea granted its anti-trust approval for merger with Sinoma.

11 23-Nov-17 SASAC agreed the merger of CNBM and Sinoma.

12 21-Dec-17 Anti-monopoly Bureau of Ministry of Commerce of PRC decided merger is not prohibited and can be implemented.

13 29-Dec-17 Received approval from stock exchange to list CNBM H to be issued as consideration for share exchange.

14 16-Jan-18 CNBM alerted FY2017 net profit to increase.

15 16-Mar-18 CNBM received approval by CSRC in relation to issuance of overseas listed foreign shares.

16 12-Apr-18 CNBM alerted Q1 2018 net profit to increase substantially.

17 20-Jun-18 CNBM to acquire 18.7% stake in Southwest Cement. From Zhonghai Trust.

18 16-Jul-18 CNBM alerted H1 2018 net profit to increase.

19 15-Oct-18 CNBM alerted 9M 2018 net profit to increase substantially.

Source: Company, DSB HK

12

5

10

15 17

18

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2.0

4.0

6.0

8.0

10.0

12.0

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-13

Feb-1

4

Apr-

14

Jun-1

4

Aug-1

4

Oct

-14

Dec

-14

Feb-1

5

Apr-

15

Jun-1

5

Aug-1

5

Oct

-15

Dec

-15

Feb-1

6

Apr-

16

Jun-1

6

Aug-1

6

Oct

-16

Dec

-16

Feb-1

7

Apr-

17

Jun-1

7

Aug-1

7

Oct

-17

Dec

-17

Feb-1

8

Apr-

18

Jun-1

8

Aug-1

8

Oct

-18

HK$

3

4

6

7

8

9 11

121314

16

19

Company Guide


Balance Sheet:

Balance sheet risk. We expect net debt to equity ratio to

remain ~100% in the next two years, with gross debt at the

Rmb200bn level, versus the company’s capex of not less than

RMB19bn for FY18F and FY19F.


Cement demand. China national cement price in East and

Central China (accounting for 52% of CNBM’s sales volume)

continues to be upbeat, mainly due to low inventory from

supply discipline. Current cement inventories (as a % of

storage capacity) in East and Central China are 44% and47%

respectively, which are 21-24ppt lower than the historical

average, and the lowest levels compared to the same period in

the past five years (2013-17).

Key Risks:

Demand risk. Better-than-expected cement prices support in

1Q19.

Company Background

China National Building Material (CNBM) is a central

government-owned enterprise. The company is the largest

cement and concrete producer in China with cement capacity

of 525mt.p.a. at end-Sep 2018. The company is also a leading

manufacturer of concrete gypsum boards, glass fibers, rotor

blades and other related products. Cement, concrete and other

business (mainly lightweight building materials, glass fibers,

engineering services) accounts for 58%, 15% and 27% of total

sales revenue. Cement, concrete and other business

contributes to 66%, 12% and 22% of total GP.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.5

0.5

0.5

0.00

0.50

1.00

1.50

2.00

2017A 2018F 2019F 2020F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

2016A 2017A 2018F 2019F 2020F

Capital Expenditure (-)

RMB m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2017A 2018F 2019F 2020F

Company Guide


Key Assumptions

FY Dec 2017A 2018F 2019F 2020F


376.8 376.8 376.8 376.8


90.4 90.4 90.4 90.4


256.0 320.5 312.3 312.3


341.6 341.6 341.6 341.6


55.3 115.0 108.8 104.7


Segmental Breakdown (RMB m)

FY Dec 2017A 2018F 2019F 2020F

Revenues (RMB m) Cement 96,465 120,745 117,680 117,680 Concrete 30,307 30,307 30,307 30,307 Aggregate 1,237 1,237 1,237 1,237 Others 55,359 55,359 55,359 55,359

Total 183,368 207,649 204,584 204,584

Gross profit (RMB m) Cement 20,834 43,315 41,004 39,465 Concrete 7,880 7,880 7,880 7,880 Aggregate 693 693 693 693 Others 18,994 13,376 13,376 13,376

Total 48,401 65,263 62,952 61,413

Gross profit Margins (%) Cement 21.6 35.9 34.8 33.5 Concrete 26.0 26.0 26.0 26.0 Aggregate 56.0 56.0 56.0 56.0 Others 34.3 24.2 24.2 24.2

Total 26.4 31.4 30.8 30.0


Company Guide


Income Statement (RMB m)

FY Dec 2017A 2018F 2019F 2020F

Revenue 183,368 207,649 204,584 204,584

Cost of Goods Sold (134,967) (142,386) (141,632) (143,170)

Gross Profit 48,401 65,263 62,952 61,413

Other Opng (Exp)/Inc (29,137) (32,995) (32,508) (32,508)

Operating Profit 19,264 32,268 30,444 28,905

Other Non Opg (Exp)/Inc 4,536 5,262 5,184 5,184

Associates & JV Inc 1,057 1,057 1,041 1,041

Net Interest (Exp)/Inc (10,852) (10,810) (12,283) (12,104)

Dividend Income 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0

Pre-tax Profit 14,005 27,777 24,387 23,027

Tax (4,235) (8,400) (7,374) (6,963)

Minority Interest (4,846) (9,521) (8,359) (7,893)

Preference Dividend 0 0 0 0

Net Profit 4,924 9,856 8,653 8,170

Net Profit before Except. 4,924 9,856 8,653 8,170

EBITDA 32,631 49,591 48,123 46,503

Growth

Revenue Gth (%) 21.2 13.2 (1.5) 0.0

EBITDA Gth (%) 34.3 52.0 (3.0) (3.4)

Opg Profit Gth (%) 75.0 67.5 (5.7) (5.1)

Net Profit Gth (%) 206.0 100.2 (12.2) (5.6)

Margins & Ratio

Gross Margins (%) 26.4 31.4 30.8 30.0

Opg Profit Margin (%) 10.5 15.5 14.9 14.1

Net Profit Margin (%) 2.7 4.7 4.2 4.0

ROAE (%) 8.0 14.7 12.0 10.6

ROA (%) 1.1 2.1 1.8 1.7

ROCE (%) 3.9 6.3 5.7 5.3

Div Payout Ratio (%) 0.0 45.2 45.2 45.2

Net Interest Cover (x) 1.8 3.0 2.5 2.4


Interim Income Statement (RMB m)

FY Dec 1H2017 2H2017 1H2018

Revenue 78,081 105,287 95,228

Cost of Goods Sold (58,954) (76,013) (66,715)

Gross Profit 19,127 29,274 28,513

Other Oper. (Exp)/Inc (11,452) (17,685) (14,749)

Operating Profit 7,675 11,589 13,764

Other Non Opg (Exp)/Inc 1,520 3,016 20

Associates & JV Inc 440 617 887

Net Interest (Exp)/Inc (5,456) (5,396) (5,456)

Exceptional Gain/(Loss) 0 0 0

Pre-tax Profit 4,179 9,826 9,215

Tax (1,261) (2,974) (2,468)

Minority Interest (1,619) (3,227) (2,935)

Net Profit 1,299 3,625 3,812

Net profit bef Except. 1,299 3,625 3,812

Growth

Revenue Gth (%) N/A N/A 22.0

Opg Profit Gth (%) N/A N/A 79.3

Net Profit Gth (%) N/A N/A 193.3

Margins

Gross Margins (%) 24.5 27.8 29.9

Opg Profit Margins (%) 9.8 11.0 14.5

Net Profit Margins (%) 1.7 3.4 4.0


Company Guide


Balance Sheet (RMB m)

FY Dec 2017A 2018F 2019F 2020F

Net Fixed Assets 176,416 184,412 191,958 190,586

Invts in Associates & JVs 0 0 0 0

Other LT Assets 104,206 104,206 104,206 104,206

Cash & ST Invts 34,555 33,535 40,481 54,918

Inventory 22,199 23,124 23,001 23,251

Debtors 106,714 117,336 115,604 115,604

Other Current Assets 9,458 9,458 9,458 9,458

Total Assets 453,548 472,071 484,709 498,024

ST Debt 147,892 147,892 147,892 147,892

Creditors 83,852 87,453 86,990 87,935

Other Current Liab 21,741 21,741 21,741 21,741

LT Debt 61,313 61,313 61,313 61,313

Other LT Liabilities 14,109 14,109 14,109 14,109

Shareholder’s Equity 64,351 69,752 74,493 78,970

Minority Interests 60,290 69,811 78,171 86,064

Total Cap. & Liab. 453,548 472,071 484,709 498,024

Non-Cash Wkg. Capital 32,778 40,724 39,333 38,638

Net Cash/(Debt) (174,650) (175,670) (168,724) (154,287)

Debtors Turn (avg days) 206.3 206.3 206.3 206.3

Creditors Turn (avg days) 224.2 224.2 224.2 224.2

Inventory Turn (avg days) 41.3 41.3 41.3 41.3

Asset Turnover (x) 0.4 0.4 0.4 0.4

Current Ratio (x) 0.7 0.7 0.7 0.8

Quick Ratio (x) 0.6 0.6 0.6 0.7

Net Debt/Equity (X) 1.4 1.3 1.1 0.9

Net Debt/Equity ex MI (X) 2.7 2.5 2.3 2.0

Capex to Debt (%) (2.5) 9.1 9.1 4.8

Z-Score (X) 0.7 0.7 0.7 0.7


Cash Flow Statement (RMB m)

FY Dec 2017A 2018F 2019F 2020F

Pre-Tax Profit 14,005 27,777 24,387 23,027

Dep. & Amort. 7,774 11,004 11,454 11,372

Tax Paid (4,235) (8,400) (7,374) (6,963)

Assoc. & JV Inc/(loss) 0 0 0 0

(Pft)/ Loss on disposal of FAs 0 0 0 0

Chg in Wkg.Cap. (7,732) (7,946) 1,391 695

Other Operating CF 0 0 0 0

Net Operating CF 9,812 22,435 29,858 28,131

Capital Exp.(net) 5,191 (19,000) (19,000) (10,000)

Other Invts.(net) 0 0 0 0

Invts in Assoc. & JV 0 0 0 0

Div from Assoc & JV 0 0 0 0

Other Investing CF 0 0 0 0

Net Investing CF 5,191 (19,000) (19,000) (10,000)

Div Paid 0 0 0 0

Chg in Gross Debt (10,175) 0 0 0

Capital Issues 0 0 0 0

Other Financing CF 0 (4,455) (3,911) (3,693)

Net Financing CF (10,175) (4,455) (3,911) (3,693)

Currency Adjustments 0 0 0 0

Chg in Cash 4,829 (1,020) 6,946 14,437

Opg CFPS (RMB) 2.08 3.60 3.37 3.25

Free CFPS (RMB) 1.78 0.41 1.29 2.15


Industry Focus

China Cement Sector

DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

*Share price appreciation + dividends

Completed Date: 28 Nov 2018 12:29:38 (HKT) Dissemination Date: 28 Nov 2018 18:56:06 (HKT)

Sources for all charts and tables are DBS HK unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

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Industry Focus

China Cement Sector

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate

1 does not serve as an officer of

the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests

2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in China National Building Material(3323 HK), Anhui Conch Cement Company Limited (914 HK) and China Resources Cement Holdings Limited (1313 HK) recommendedin this report as of 26 Nov 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this ResearchReport.

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DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities

as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to

obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security

discussed in this document should contact DBSVUSA exclusively.

4. Disclosure of previous investment recommendation produced:

DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investmentrecommendations in respect of the same securities / instruments recommended in this research report during the preceding 12months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendationspublished by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or

a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

Industry Focus

China Cement Sector

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Industry Focus

China Cement Sector

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Industry Focus

China Cement Sector

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