Rating Company Buy West China...

Deutsche Bank Markets Research

Rating

Buy Asia

China

Resources

Construction Materials

Company

West China Cement

Date

17 March 2017

Forecast Change

NDR takeaways – sustained recovery in earnings; M&A still in play

Reuters Bloomberg Exchange Ticker 2233.HK 2233 HK HSI 2233

Forecasts And Ratios

Year End Dec 31 2015A 2016A 2017E 2018E 2019E

Sales (CNYm) 3,500.9 3,719.3 4,193.1 4,429.4 4,726.5

EBITDA (CNYm) 664.3 1,047.0 1,498.6 1,697.8 1,831.7

Reported NPAT (CNYm) -309.2 10.3 441.8 653.6 806.5

Reported EPS FD(CNY) -0.06 0.00 0.08 0.12 0.15

PER (x) – 29.6 12.5 8.5 6.9

EV/EBITDA (x) 12.9 7.8 4.8 3.5 2.8

Yield (net) (%) 0.0 0.0 2.8 5.3 8.0

Source: Deutsche Bank estimates, company data

FY16 results NDR in HK on March 14-16

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Price at 16 Mar 2017 (HKD) 1.15

Price target - 12mth (HKD) 1.38

52-week range (HKD) 1.64 - 0.65

HANG SENG INDEX 24,288

Johnson Wan

Research Analyst

(+852 ) 2203 6163

[email protected]

Key changes

Sales (FYE) 3,992 to 4,193 ↑ 5.0%

Op prof margin (FYE)

- ↑ 0.0%

Net profit (FYE)

481.1 to 441.8 ↓ -8.2%

Source: Deutsche Bank

Price/price relative

0.4

0.8

1.2

1.6

2.0

3/15 9/15 3/16 9/16

West China Cement

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute 8.5 30.7 -29.4

HANG SENG INDEX 0.7 10.3 19.9


DBe vs Cons

EPS (RMB/sh) DBe Cons % Diff

2017E 0.08 0.07 18.1%

2018E 0.12 0.09 40.2%

2019E 0.15 0.10 48.8%

Source: Deutsche Bank, Bloomberg Finance LP

After three years of price war and oversupply in Shaanxi, earnings for WCC have troughed and are now recovering strongly as a result of strict price discipline. On March 14, WCC announced RMB20/t of price hikes, as inventory levels are empty after successful production halts throughout winter. The change in political landscape could also be a major catalyst for future demand, with Xi’an’s new party secretary being a close ally to Xi. His mandate is to develop a “grand Xi’an.” Thus, infrastructure projects are being started, and major investments by the likes of Wanda/Greenland/Alibaba will likely take place. The deal with Conch is on the table but it will unlikely be imminent.

Cooperation with Conch WCC does not rule out further equity partnership with Conch, but both parties are still in a 12-month cooling period that expires June 30, 2017. Management believes that NW China is a key growth region for Conch, while WCC is the most dominant cement player in Shaanxi. As WCC’s second largest shareholder, Conch has two board seats and has had a positive impact on WCC thus far. For example, WCC’s new head of procurement from Conch has helped reduce costs by RMB5-10/t in 2016 through introducing a better material mix and new channels to purchase cheaper materials.

Resuming dividends and paying down debt With WCC putting the brakes on capacity growth, capex requirements should drop off significantly in the next few years (RMB150m/100m in FY17/18). WCC expects GP/t to be sustained at RMB50-55/t for 2017, which would translate to operating cash flow of c.RMB1.2bn in 2017 by our estimates. At 20%/23% FCF yield in 2017/18, WCC is the highest in the cement industry. With ample cash of RMB1.3bn at end-2016, WCC has repaid RMB400m from its STN, and further debt repayments can be expected in 2017. WCC also expects dividends to resume after a two-year suspension and does not rule out even a special dividend in 2017. By the end of 2017, WCC’s net gearing should drop to <30%.

Valuation and risks We derive our target price of HKD1.38 based on EV/t of RMB350/t, reflecting the lower end of a potential M&A deal with Conch (Conch’s average cost in WCC is at HKD1.35). Our target price also implies 1x FY18E P/B on 10% ROE, which we believe is justified in a normalized year. Risks: breakdown of price discipline in Shaanxi and a higher-than-expected hike in coal prices.

Distributed on: 17/03/2017 06:48:33 GMT

17 March 2017


West China Cement


Model updated:16 March 2017

Running the numbers

Asia

China


West China Cement Reuters: 2233.HK Bloomberg: 2233 HK

Buy Price (16 Mar 17) HKD 1.15

Target Price HKD 1.38

52 Week range HKD 0.65 - 1.64

Market Cap (m) HKDm 6,234

USDm 803

Company Profile

West China Cement Limited is a leading producer of cement and clinker in North Western China, currently operating in Shaanxi and Xinjiang provinces. The company employs NSP technology in all of its production lines.

Price Performance

0.4

0.8

1.2

1.6

2.0

Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16

West China CementHANG SENG INDEX (Rebased)

Margin Trends

-10

0

10

20

30

40

14 15 16 17E 18E 19E

EBITDA Margin EBIT Margin

Growth & Profitability

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

14 15 16 17E 18E 19E

Sales growth (LHS) ROE (RHS)

Solvency

0

2

4

6

8

10

12

-20

0

20

40

60

80

14 15 16 17E 18E 19E

Net debt/equity (LHS) Net interest cover (RHS)

Johnson Wan

+852 2203 6163 [email protected]

Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (CNY) 0.01 -0.03 0.03 0.08 0.12 0.15

Reported EPS (CNY) 0.01 -0.06 0.00 0.08 0.12 0.15

DPS (CNY) 0.00 0.00 0.00 0.03 0.05 0.08

BVPS (CNY) 1.1 1.3 1.1 1.2 1.3 1.3

Weighted average shares (m) 4,528 5,000 5,421 5,421 5,421 5,421

Average market cap (CNYm) 3,046 5,145 5,490 5,537 5,537 5,537

Enterprise value (CNYm) 6,417 8,568 8,167 7,126 5,973 5,160

Valuation Metrics P/E (DB) (x) 73.8 nm 29.6 12.5 8.5 6.9

P/E (Reported) (x) 84.9 nm 531.9 12.5 8.5 6.9

P/BV (x) 0.59 1.00 0.69 0.88 0.81 0.76

FCF Yield (%) 11.0 nm 21.2 20.0 23.2 19.3

Dividend Yield (%) 0.3 0.0 0.0 2.8 5.3 8.0

EV/Sales (x) 1.7 2.4 2.2 1.7 1.3 1.1

EV/EBITDA (x) 6.5 12.9 7.8 4.8 3.5 2.8

EV/EBIT (x) 18.0 nm 22.8 8.2 5.4 4.1

Income Statement (CNYm)

Sales revenue 3,883 3,501 3,719 4,193 4,429 4,727

Gross profit 598 463 677 994 1,234 1,410

EBITDA 984 664 1,047 1,499 1,698 1,832

Depreciation 626 703 688 633 596 559

Amortisation 0 0 0 0 0 0

EBIT 357 -38 359 866 1,102 1,272

Net interest income(expense) -222 -218 -249 -195 -147 -126

Associates/affiliates 0 0 10 19 21 23

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 135 -257 110 671 955 1,147

Income tax expense 96 51 104 242 312 351

Minorities 4 2 5 7 10 12

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 36 -309 10 442 654 807

DB adjustments (including dilution) 5 157 175 0 0 0

DB Net profit 41 -152 186 442 654 807

Cash Flow (CNYm)

Cash flow from operations 904 193 1,316 1,260 1,385 1,169

Net Capex -568 -336 -150 -150 -100 -100

Free cash flow 336 -144 1,166 1,110 1,285 1,069

Equity raised/(bought back) -22 1,204 0 0 0 0

Dividends paid -91 -9 0 0 -155 -294

Net inc/(dec) in borrowings 3,479 485 109 -401 -396 5

Other investing/financing cash flows -3,624 -1,595 -473 -16 6 21

Net cash flow 77 -59 802 693 740 800

Change in working capital 267 -410 -232 28 133 -151

Balance Sheet (CNYm)

Cash and other liquid assets 708 528 1,346 2,050 2,796 3,603

Tangible fixed assets 8,071 8,257 7,564 7,114 6,652 6,226

Goodwill/intangible assets 800 1,030 998 1,011 1,024 1,037

Associates/investments 0 0 41 31 52 75

Other assets 1,189 1,568 1,233 1,480 1,384 1,608

Total assets 10,768 11,382 11,182 11,687 11,908 12,549

Interest bearing debt 4,033 3,904 4,013 3,612 3,217 3,221

Other liabilities 1,719 1,575 1,255 1,713 1,821 1,933

Total liabilities 5,752 5,479 5,268 5,325 5,037 5,154

Shareholders' equity 4,971 5,856 5,863 6,304 6,803 7,316

Minorities 46 47 51 57 67 80

Total shareholders' equity 5,016 5,904 5,913 6,362 6,871 7,396

Net debt 3,325 3,376 2,667 1,562 420 -382

Key Company Metrics

Sales growth (%) -6.8 -9.8 6.2 12.7 5.6 6.7

DB EPS growth (%) -86.4 na na 137.9 47.9 23.4

EBITDA Margin (%) 25.3 19.0 28.1 35.7 38.3 38.8

EBIT Margin (%) 9.2 -1.1 9.6 20.6 24.9 26.9

Payout ratio (%) 25.0 nm 0.0 35.0 45.0 55.0

ROE (%) 0.7 -5.7 0.2 7.3 10.0 11.4

Capex/sales (%) 15.0 10.0 4.0 3.6 2.3 2.1

Capex/depreciation (x) 0.9 0.5 0.2 0.2 0.2 0.2

Net debt/equity (%) 66.3 57.2 45.1 24.5 6.1 -5.2

Net interest cover (x) 1.6 nm 1.4 4.4 7.5 10.1

Source: Company data, Deutsche Bank estimates

17 March 2017


West China Cement


NDR Q&A

OPERATING METRICS

What is WCC’s guidance for 2017?

WCC guides for volume of 18mt, ASP of c.RMB270-280/t including tax, ACP

flat from 2016, and GP/t of c.RMB50-55/t. If GP/t is at RMB50/t, EBITDA could

reach RMB1.5bn, with cash exceeding RMB2bn by year end. Capex will be

RMB150m in 2017 and c.RMB100m after 2017.

What is your view on cement demand in the future?

We are optimistic over the demand from infrastructure, as multiple high-speed

railways (Xi’an-Chongqing, Xi’an-Wuhan, Xi’an-Yan’an), highways, and airports

will start construction in 2017. The property market has also bottomed after

three years of doldrums, but with higher pricing and sales, we see construction

starting to pick up. The overall demand for cement is likely to increase slightly

over 2016.

New Xi’an government official, Mr. Wang Yongkang, a former official in

Zhejiang, has a mission to transform Xi’an into a world-class metropolitan city

in West China. Mr. Wang presented a plan during the NPC meetings last week

(early March 2017). The population in Xi’an is expected to grow from 8m now

to 14-15m by the end of 13th FYP. Several property developers have already

pledged to invest in Xi’an, including Wanda, Evergrande, Greenland, Sunac,

etc. The most notable example would be Wanda’s plan to build 19 Wanda

Plazas and one big Wanda City development complex (GFA c.2m sqm) with a

capex plan of RMB100bn, representing 5% of Shaanxi FAI in 2015. Other

corporates from various sectors, including leading companies in Zhejiang and

Alibaba, have also committed to invest in Xi’an and Shaanxi with a total

amount over RMB400bn. This would be another catalyst of cement demand

growth over next two to three years.

Can you give us an update on the ASP and GP/t for January-February 2017?

ASP usually drops in the beginning of the year, but the drop this year has been

relatively mild. In Central Shaanxi, ASP is c.RMB270/t including tax. ACP is

higher currently due to the low season, so the GP/t is currently at RMB45/t. We

expect GP/t to rise in the high season.

Production lines in Shaanxi have been restarted since March 1. Inventory levels

are almost zero now, which provides a good opportunity for a price hike. In

fact, the first price hike, of RMB20/t, was announced on March 13 in Central

Shaanxi and has been implemented well to bring the price to RMB280/t. Prices

are expected to be higher by the end of the March. Prices could still increase

by RMB20/t before cement inflow becomes profitable.

Currently, North Xinjiang ASP is c.RMB270/t including tax, while South

Xinjiang ASP is c.RMB350/t including tax. Xinjiang average GP/t is around

RMB60/t.

17 March 2017


West China Cement


CONCH-WCC MERGER

What is the current status of Conch-WCC merger?

WCC does not rule out further equity partnership with Conch. The 12-month

window between each material restructuring would pass by June 30, 2017,

and Conch-WCC can technically propose another merger by then. However,

the discussion of this has not been restarted so far.

Why did the proposal fail last time? How can WCC get approvals this time?

The cross-border equity-asset swap was not approved before the deal lapsed.

Government officials are reluctant to grant approval, as they have not seen

such a financial structure before. We will seek alternative arrangements if we

propose another merger. Anti-trust approval by MOFCOM will still be required.

Both Conch and WCC want to avoid a general offer and maintain WCC as

listed entity, which is a pre-requisite of the merger.

FINANCIAL STATEMENTS

Why is the effective tax rate so high at 85% in FY16?

That is because we have not been able to deduct our FX loss, overseas interest

expense, and costs that amounted to RMB300m. It will drop to 35% in FY17 if

we assume no further FX loss in 2017. The overseas expenses of RMB120m

(RMB80m in interest expense and RMB40m in other costs) are not tax

deductible.

Why has the limestone cost decreased in FY16?

Limestone reserve assets are all self owned. The drop in production cost in

FY16 was due to a lower contracting fee for extracting limestone.

Why is the new onshore STN so expensive? Is there an alternative financing

option?

The recent onshore STN issue carries a 6.98% interest rate, which is

significantly higher than the matured STN at 5.5%. Access to onshore capital

markets is hard and expensive. Banks are unwilling to lend to private

producers, especially after Shanshui defaulted on its onshore coupons. We

heard that new loan applications by other private producers have been

declined even if the mature loans have been repaid.

MISC

Why did the demand for cement in Shaanxi drop so much in 2016?

Demand for cement in Shaanxi has dropped by c.8% to 53mt from 58mt in

2015. We believe the economy of Shaanxi was also dragged down by the

economic slowdown nationwide. However, the central government would like

to increase investment to speed up the development of the region.

What is the source of demand for cement in Shaanxi?

The demand of WCC is composed of 50% rural demand, 15-20% infrastructure

demand, 20% real estate demand, and 10% others. While rural demand is

relatively inelastic, the key drivers of demand are infrastructure and real estate.

17 March 2017


West China Cement


What is the WCC strategy in Xinjiang and Guizhou, given the severe over-

capacity issue?

The over-capacity issue in Xinjiang is the worst in China, and utilization is less

than 50% in general. Despite this, our operation in the region is relatively

stable, with ASP over RMB300/t in FY16. The cooperation last summer

supported cement prices and resulted in considerable profit.

In Guizhou, our plant enjoys a location advantage, being the closest plant to

Guiyang, and it has a 100% utilization rate most of the time. Also, the

transportation cost has been very low.

How did the environmental policy affect WCC?

All production lines are required to be equipped with a denitrator to reduce the

emission of nitrogen compounds. All production lines are now using bags to

collect dust, which is more efficient but more expensive than the electric

removal method used in the past. Besides, all of our production lines have

been equipped with residual heat power generators, which save c.30% power

consumption.

What are the key takeaways from the industry meeting last summer in

Xinjiang?

The supply-side reform funding by the central government will not be available

to cement sector. The industry must restore profitability by itself.

All participants agreed to halt production and coordinate the production

volume according to capacity. Staff of other producers will conduct onsite

checks to ensure that others produce only up to their allowed quota. This has

proven to be very successful in 2H16.

Meanwhile, price discipline should be led by leading SOE producers such as

Conch and CNBM.

How can the industry cut production capacity permanently?

There are three possible ways.

Leading SOE producers acquire smaller private producers and shut

down the inefficient lines.

The 32.5-grade cement removal will cut 800m tons of production

capacity (national capacity at 3.6bn tons). The expected timeline is

around one to two years, and the removal will be implemented

province by province rather than on a national level.

Setting up industry-raised funding with a target of RMB200-300m in

three years to buy out and shut down individual producers. The funds

will be raised by charging surcharges on top of the power tariff. Target

producers are those with a single production line with smaller

capacity, e.g. <2,000t/d. The total production capacity cut is estimated

to be c.300-400mt, which represents 10% of national capacity.

17 March 2017


West China Cement


Demand outlook

Real estate and infrastructure sectors recovering

We noticed that two main sources of demand, real estate and infrastructure,

are increasing in Shaanxi. The “grand Xi’an” has attracted multiple property

developers increasing their project portfolios in Xi’an. With inventory periods

falling and property sales surging, inventory pressure is relatively low, and it

has become reasonable to carry out new development projects. We have seen

that housing starts in Shaanxi have recorded double-digit growth from 2H16.

On the infrastructure side, multiple high-speed railways (Xi’an-Chongqing,

Xi’an-Wuhan, Xi’an-Yan’an), highways, and an airport will start construction in

2017, which should support the demand for cement for the next two to three

years. We believe that this is only the beginning of the investment cycle.

Figure 1: Inventory periods in Xi’an Figure 2: Housing starts in Shaanxi

0

10

20

30

40

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60

70

Mar-

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Jun-1

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Sep

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Dec-1

6

Xi'an Average +1SD -1SD

Months

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

0

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No

v-1

6

Housing starts yoy %

k sqm


Source: Deutsche Bank, Wind

Figure 3: Property sales and inventory in Xi’an Figure 4: FAI in Shaanxi

0

5,000

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20,000

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Monthly sales Inventory

k sqm

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FAI FAI yoy %

RMB bn



17 March 2017


West China Cement


Revisions

Better pricing and GP/t, but dragged by coal costs in FY17E

We revised the ASP and GP/t upward based on the successful price discipline

so far in Shaanxi. We are more optimistic on volume as well given the strong

potential demand from the real estate and infrastructure sectors. The strong

operating results should translate into higher cash flow for deleveraging and a

reduction of finance cost.

On the flip side, we revise our FY17 NP estimate downward by 10%, as we

assume a higher effective tax rate and higher coal prices.

Figure 5: P&L changes

New Old % chg

For year ended Dec 31 2016A 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

Revenue 3,719 4,193 4,429 4,727 3,992 4,141 4,428 5% 7% 7%

Cost of sales (3,043) (3,199) (3,195) (3,317) (2,992) (2,974) (3,096) 7% 7% 7%

Gross Profit 677 994 1,234 1,410 1,000 1,168 1,332 -1% 6% 6%

SG&A (285) (291) (299) (311) (282) (282) (292) 3% 6% 6%

Other Income (33) 162 167 173 106 96 87 53% 75% 100%

EBITDA 1,047 1,499 1,698 1,832 1,490 1,615 1,728 1% 5% 6%

Depreciation and Amortization (688) (633) (596) (559) (666) (633) (601) -5% -6% -7%

Operating Profit (EBIT) 359 866 1,102 1,272 824 981 1,127 5% 12% 13%

Net interest (249) (195) (147) (126) (224) (209) (201) -13% -29% -37%

Pre-tax profit 119 690 976 1,170 609 782 937 13% 25% 25%

Income tax (104) (242) (312) (351) (121) (155) (186) 100% 102% 89%

Minority interests (5) (7) (10) (12) 3 4 5 -329% -364% -372%

Net Profit 10 442 654 807 491 631 756 -10% 4% 7%

EPS 0.002 0.08 0.12 0.15 0.09 0.12 0.14 -10% 4% 7% Source: Deutsche Bank estimates, Company data

Figure 6: Operating data assumptions

New Old % chg

For year ended Dec 31 2016A 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

Cement Capacity 29.2 29.2 29.2 29.2 29.2 29.2 29.2 0% 0% 0%

Cement & Clinker sales volume 17.7 18.0 18.6 19.3 18.2 18.2 18.8 -1% 2% 2%

Cement & Clinker ASP 207.0 232.5 238.6 245.3 219.4 227.6 235.3 6% 5% 4%

Unit Cement COGS 172.3 177.4 172.1 172.1 164.5 163.4 164.5 8% 5% 5%

Unit Gross Profit 34.7 55.1 66.5 73.2 55.0 64.2 70.8 0% 4% 3%

Unit SG&A 16.1 16.1 16.1 16.1 15.5 15.5 15.5 4% 4% 4%

Unit EBITDA 59.3 83.1 91.5 95.1 81.9 88.7 91.8 1% 3% 4%

Unit EBIT 20.3 48.0 59.4 66.0 45.3 53.9 59.9 6% 10% 10%

Unit Financing cost 14.1 10.8 7.9 6.5 12.3 11.5 10.7 -12% -31% -39%

Unit Net Profit 0.6 24.5 35.2 41.9 27.0 34.7 40.2 -9% 2% 4% Source: Deutsche Bank estimates, Company data

17 March 2017


West China Cement


Valuation

Maintaining Buy with target price unchanged at HKD1.38

We derive our target price of HKD1.38 based on EV/t of RMB350/t, reflecting

the lower end of a potential M&A deal with Conch (Conch’s average cost in

WCC is at HKD1.35). Our target price also implies 1x FY18E P/B on 10% ROE,

which we believe is justified in a normalized year.

Risks include breakdown of price discipline in Shaanxi and a higher-than-

expected hike in coal prices.

Valuation band charts

Figure 7: Forward P/E Figure 8: Forward P/B

Average,12.6x

+1SD,15.3x

-1SD,9.8x

14.4x

-4000%

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Fwd PE

Forward PE Average Average +1SD

Average -1SD EPS growth

Fwd EPS growth

Average,0.9x

+1SD,1.1x

-1SD,0.6x

-8%

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Forward PB Average Average +1SD

Average -1SD ROE

ROE



Figure 9: Forward EV/EBITDA Figure 10: Forward EV/Capacity

Average,7.8x

+1SD,9.4x

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17 March 2017


West China Cement


Comp sheet

Figure 11: Chinese cement companies comp sheet

Conch(H) Conch(A) CNBM CRC* BBMG (H) BBMG (A) Sinoma WCC TCC** ACC Average

Ticker 0914.HK 600585.SS 3323.HK 1313.HK 2009.HK 601992.SS 1893.HK 2233.HK 1101.TW 1102.TW

Reporting currency CNY CNY CNY HKD CNY CNY CNY CNY TWD TWD

Share price as of 15/3/2017 in local curr 27.95 21.85 5.74 4.44 3.85 4.87 2.56 1.09 38.20 30.15

Target price (in local curr) 34.80 32.20 4.55 5.26 4.54 4.21 3.48 1.38 36.06 29.14

Potential upside/downside (%) 25% 47% -21% 18% 18% -14% 36% 27% -6% -3%

Rating Buy Buy Hold Buy Buy Hold Buy Buy Hold Hold

Market cap (USD bn) 19.1 16.8 4.0 3.7 5.4 6.1 1.2 0.7 4.6 3.3

Cement capacity (mt)

2013 233.3 233.3 386.0 75.5 45.5 45.5 105.9 23.7 50.8 33.3 119.2

2014 264.0 264.0 399.0 78.3 45.7 45.7 109.7 27.0 58.4 35.0 127.1

2015 290.0 290.0 404.0 79.3 45.7 45.7 111.9 29.2 65.4 35.0 132.6

2016E 316.0 316.0 411.5 81.3 45.7 45.7 111.9 29.2 70.4 40.0 138.3

2017E 336.0 336.0 419.0 85.3 45.7 45.7 111.9 29.2 78.0 44.0 143.6

2018E 356.0 356.0 426.6 85.3 45.7 45.7 111.9 29.2 82.0 48.0 148.1

2017 capacity chg 6% 6% 2% 5% 11% 10% 4%

2016-2018E CAGR (%) 6% 6% 2% 2% 8% 10% 3%

Total sales volume (mt)

2013 228.3 228.3 283.1 74.9 38.9 38.9 84.7 18.2 44.7 25.7 99.8

2014 249.5 249.5 289.5 77.9 40.6 40.6 84.4 17.7 45.0 28.3 104.1

2015 255.6 255.6 277.9 81.4 39.3 39.3 80.7 17.1 47.7 28.4 103.5

2016E 273.2 273.2 294.5 84.9 43.2 43.2 86.8 17.4 52.6 29.6 110.3

2017E 284.1 284.1 301.0 86.3 45.0 45.0 89.0 18.2 55.7 32.0 113.9

2018E 295.2 295.2 306.6 88.1 46.7 46.7 91.8 18.2 59.7 35.0 117.7

2017 Sales volume chg 4% 4% 2% 2% 4% 4% 3% 5% 6% 8% 3%

2016-2018E CAGR (%) 4% 4% 2% 2% 4% 4% 3% 2% 7% 9% 3%

Sales exposure by regions (2015)

East 29% 29% 44% 11% 14% 10%

Central 30% 30% 13% 1% 1%

South 16% 16% 1% 76% 13% 46%

West 23% 23% 30% 13% 1% 1% 68% 100% 37%

North 11% 98% 98% 5% 3%

Export 3% 3%

ASP Assumptions

2013 237 237 253 314 233 233 264 229 290 253 259

2014 236 236 252 333 214 214 250 220 298 247 256

2015 194 194 212 266 178 178 209 200 225 195 210

2016E 195 195 200 249 179 179 220 202 208 193 206

2017E 210 210 215 269 202 202 229 219 218 193 219

2018E 213 213 215 274 210 210 235 228 229 193

ASP chg 14.8 14.8 14.2 20.7 22.9 22.9 8.5 16.9 10.0 14

2017 ASP chg % 8% 8% 7% 8% 13% 13% 4% 8% 5% 7%

Profitability - GP (per tonne)

2013 79 79 65 89 42 42 61 40 70 58 63.1

2014 82 82 71 106 33 33 58 35 88 62 66.8

2015 55 55 49 61 18 18 39 28 35 30 39.3

2016E 65 65 49 67 26 26 49 38 42 30 45.7

2017E 75 75 59 85 46 46 55 55 45 38 57.4

2018E 80 80 61 90 50 50 59 64 48 46 62.4

EBITDA (per tonne)

2013 75.5 75.5 90.5 87.7 40.1 40.1 63.4 69.3 71.1

2014 77.9 77.9 100.3 104.7 62.5 62.5 67.2 55.7 78.0

2015 59.0 59.0 77.2 45.5 67.5 67.5 37.0 38.8 54.2

2016E 60.2 60.2 71.2 56.2 58.6 58.6 41.3 58.1 57.6

2017E 70.0 70.0 80.3 77.0 76.3 76.3 47.3 81.9 72.1

2018E 75.9 75.9 82.9 83.9 79.0 79.0 50.6 88.7

* in HKD** Cement operating data in HKDNote: ACC and TCC's operating data assumptions are that of ACCH and TCCI

Source: Deutsche Bank, Company data, Bloomberg Finance LP

17 March 2017


West China Cement


Figure 12: Chinese cement companies comp sheet

3/15/2017

Conch(H) Conch(A) CNBM CRC* BBMG (H) BBMG (A) Sinoma WCC TCC** ACC Average

Ticker 0914.HK 600585.SS 3323.HK 1313.HK 2009.HK 601992.SS 1893.HK 2233.HK 1101.TW 1102.TW

Reporting currency CNY CNY CNY HKD CNY CNY CNY CNY TWD TWD

Share price as of 15/3/2017 in local curr 27.95 21.85 5.74 4.44 3.85 4.87 2.56 1.09 38.20 30.15

Target price (in local curr) 34.80 32.20 4.55 5.26 4.54 4.21 3.48 1.38 36.06 29.14

Potential upside/downside (%) 25% 47% -21% 18% 18% -14% 36% 27% -6% -3%

Rating Buy Buy Hold Buy Buy Hold Buy Buy Hold Hold

Market cap (USD bn) 19.1 16.8 4.0 3.7 5.4 6.1 1.2 0.7 4.6 3.3

Valuation - P/E

2014 10.1 8.1 5.4 8.3 17.7 12.4 8.0 73.8 15.6 15.6 19.3

2015 14.5 14.4 27.8 13.9 25.9 24.1 7.8 na 24.2 30.3 20.6

2016E 15.3 13.3 21.3 10.1 13.3 18.9 16.0 22.6 20.7 18.8 17.3

2017E 11.7 10.1 12.8 9.1 10.5 14.8 7.8 11.5 16.9 15.9 12.0

2018E 10.0 8.7 10.8 7.7 9.6 13.6 6.6 9.0 14.5 13.0 10.1

2017 PE @ TP 14.4 14.4 10.0 10.8 12.3 12.8 10.5 na 16.0 12.9 12.4

P/B

2014 1.8 1.8 0.8 1.2 1.5 1.5 0.5 0.6 1.4 0.9 1.1

2015 1.2 1.3 0.4 0.6 1.2 1.3 0.3 1.0 0.9 0.7 0.8

2016E 1.7 1.5 0.6 0.8 0.9 1.3 0.5 0.9 1.3 0.7 0.9

2017E 1.6 1.4 0.6 1.0 0.9 1.2 0.5 0.9 1.3 0.7 0.9

2018E 1.4 1.2 0.6 0.9 0.8 1.2 0.5 0.8 1.2 0.7 0.9

2017 PB @ TP 1.9 2.0 0.5 1.2 1.0 1.1 0.7 1.0 1.2 0.7 1.0

ROE (%)

2014 18% 18% 15% 16% 8% 8% 5% 1% 9% 7% 10%

2015 11% 11% 2% 4% 6% 6% 5% -6% 5% 3% 4%

2016E 11.9% 12% 2% 5% 7% 7% 3% 1% 6% 4% 5%

2017E 14.2% 14% 4% 12% 9% 9% 7% 8% 8% 5% 8%

2018E 14.9% 15% 5% 13% 9% 9% 7% 9% 9% 6% 9%

EV/tonne (RMB/t)

2014 562.5 495.6 495.3 445.2 1,312.1 1,581.2 423.3 294.1 944.6 981.9 682.4

2015 512.1 451.2 489.1 439.6 1,312.1 1,581.2 415.0 271.9 843.6 983.0 658.3

2016E 470.0 414.1 480.2 428.7 1,312.1 1,581.2 415.0 271.9 783.7 860.0 627.7

2017E 442.0 389.4 471.6 408.6 1,312.1 1,581.2 415.0 271.9 707.4 781.7 601.3

2018E 417.1 367.5 463.3 408.6 1312.1 1581.2 415.0 271.9 672.9 716.5 584.7

EV/EBITDA

2014 7.6 6.7 7.0 4.8 10.3 12.4 6.0 8.1 8.4 10.8 7.9

2015 9.8 8.7 9.1 10.6 11.0 13.3 6.6 12.0 14.1 16.0 11.1

2016E 9.0 7.9 9.4 8.2 9.5 11.4 6.8 7.9 10.9 16.6 9.8

2017E 7.3 6.5 8.2 5.9 8.2 9.9 5.8 5.3 9.3 14.2 8.0

2018E 6.5 5.7 7.8 5.3 7.8 9.4 5.3 4.7 8.3 12.2

2017 EV/EBITDA @ TP 8.9 9.2 7.9 6.7 9.6 9.8 6.1 6.4 9.0 12.2 8.4

Neb debt/equity (%)

2014 11% 11% 240% 56% 81% 81% 78% 66% 42% 54% 78%

2015 20% 20% 216% 63% 65% 65% 60% 57% 43% 54% 72%

2016E 11% 11% 223% 56% 32% 32% 67% 48% 60% 58% 69%

2017E 7% 7% 220% 42% 24% 24% 68% 32% 60% 62% 64%

2018E 2% 2% 210% 34% 16% 16% 68% 14% 74% 66%

EPS

2014 2.07 2.07 1.10 0.64 0.26 0.26 0.17 0.01 2.93 2.98

2015 1.42 1.42 0.19 0.16 0.21 0.21 0.22 -0.06 1.56 1.55

2016E 1.64 1.64 0.24 0.20 0.26 0.26 0.14 0.00 1.84 1.96

2017E 2.15 2.15 0.40 0.49 0.33 0.33 0.29 0.08 2.25 2.26

2018E 2.50 2.50 0.48 0.58 0.36 0.36 0.35 0.12 2.63 2.68

EPS growth (%)

2014 17.0% 17.0% 2.7% 25.8% -30.9% -30.9% 39.3% -90.5% 8.0% -11.0% -5%

2015 -31.3% -31.3% -82.8% -75.9% -19.5% -19.5% 32.7% -880.0% -46.7% -48.1% -144%

2016E 15.6% 15.6% 28.2% 30.6% 23.1% 23.1% -35.1% -103.1% 17.4% 26.7% 0%

2017E 30.7% 30.7% 66.9% 140.8% 27.5% 27.5% 106.0% 4180.6% 22.7% 15.4% 574%

2018E 16.5% 16.5% 18.6% 18.3% 8.9% 8.9% 18.2% 47.9% 16.5% 18.5% 20%

2016-2018E CAGR (%) 23% 23% 41% 69% 18% 18% 56% 696% 20% 17% 117%

Dividend yield (%)

2014 3.1% 3.9% 2.7% 3.2% 1.1% 1.6% 2.3% 0.3% 5.4% 6.6% 3.1%

2015 2.1% 2.1% 0.5% 2.0% 0.8% 0.9% 1.8% 0.0% 3.3% 3.5% 1.7%

2016E 2.0% 2.3% 0.7% 3.3% 1.6% 1.1% 1.1% 0.0% 3.9% 5.1% 2.2%

2017E 2.6% 3.0% 1.1% 5.5% 2.0% 1.4% 2.3% 2.6% 4.7% 5.9% 3.3%

2018E 3.0% 3.4% 1.4% 7.2% 2.2% 1.5% 2.7% 3.9% 5.5% 7.0% 4.1%

* in HKD** Cement operating data in HKDNote: ACC and TCC's operating data assumptions are that of ACCH and TCCI

Source: Deutsche Bank, Company data, Bloomberg Finance LP

17 March 2017


West China Cement


Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

West China Cement 2233.HK 1.15 (HKD) 16 Mar 17 13 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

13. As of the end of the preceding week, Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=2233.HK

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Johnson Wan

Historical recommendations and target price: West China Cement (2233.HK) (as of 3/16/2017)

1

23

4

56

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 29/03/2015: Buy, Target Price Change HKD1.50 Johnson Wan 4. 31/08/2015: Buy, Target Price Change HKD2.21 Johnson Wan



http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=2233.HK

17 March 2017


West China Cement


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

54 %

36 %

10 %17 % 17 % 21 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

17 March 2017


West China Cement


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West China Cement


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Number in South Africa: 1998/003298/10).

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Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters

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Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall

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District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

17 March 2017


West China Cement


by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services

activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai

International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been

distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as

defined by the Dubai Financial Services Authority.

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Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian

Corporations Act and New Zealand Financial Advisors Act respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon

request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2017 Deutsche Bank AG

https://australia.db.com/australia/content/research-information.html

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Stuart Kirk Head of Thematic Research

International locations

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Level 16

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Australia

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Deutsche Bank AG

Große Gallusstraße 10-14

60272 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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