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Yum Cha 飲 茶 March 23, 2015

RESEARCH NOTES

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 24,375.2 (0.4)

HSCEI 12,156.4 0.3

Shanghai COMP 3,617.3 1.0

Shenzhen COMP 1,852.9 1.4

Gold 1,186.5 0.3

BDIY 591.0 1.2

Crude Oil, WTI(US$/BBL) 45.9 (1.4)

Crude Oil, BRENT(US$/BBL) 54.8 (1.0)

HIBOR, 3-M 0.4 0.4

SHIBOR, 3-M 4.9 (0.0)

RMB/USD 6.2 0.1

DATA RELEASES DUE THIS WEEK

Mar 23 HSBC China Manufacturing PMI

Mar 23 Conference Board China February

Leading Economic Index

Mar 24 Westpac-MNI Consumer Sentiment

Mar 24 Bloomberg March China Economic

Survey

Mar 26 Industrial Profits YoY

Mar 27 Leading Index

ZCSR [3898.HK; BUY] - ZCSR announced FY14 results during the weekend.

Revenue was amounted to RMB12.7bn, up 43% year-on-year (YoY), beating

consensus by 9%. Gross profit margin (GPM) was up 2.2ppt YoY to 37.4% in FY14

mainly due to the change of product-mix with high contribution of MUs and locomotive

products. Net margin improved 2.3ppt YoY to 19%, and net income amounted to

RMB2.4bn in FY14, up 63% YoY, beating consensus by 12%. ZCSR maintained net

cash position of RMB 2.6bn at end-2014. More information and guidance on the

impact from merger of CSR and CNR is expected from the analyst briefing today.

Maintain BUY.

HILONG [1623.HK; HOLD] - Hilong’s 2014 net profit came in at RMB398m.

Excluding an one-off tax refund of RMB38.4m in 1H14 and adding back non-cash

expenses on CB, options and swap for both 2013 and 2014, recurring net profit in

2014 was RMB375m (-12% YoY), or 13% above our estimates as Hilong capitalized

RMB24m of interest expenses (21% of total). The results imply a recurring net profit

decline of 6% YoY in 2H14, versus a drop of 21% in 1H14. Hilong declared dividend

of HK$0.05 per share, implying pay-out ratio of ~17% (down from 29-30% over the

past three years). We are concerned about the 31% increase in the trade receivables

(versus a 5% revenue growth), with past due jumped 43% YoY. On the positive side,

we are encouraged by the strong sales in overseas market and resilient oilfield

services segment. Our earnings estimates, TP and rating are under review.

CSCI [3311.HK; BUY] - CSCI reported net profit of HK$3.46bn for 2014, up 25.7%

YoY (EPS growth: 21.9%), in line with market consensus and our forecast. The

company received buy-back payment of HK$3bn for its BT projects and recorded

operating cash inflow of HK$2.4bn (2013: HK$1.86bn). Based on current project

pipeline, management feels comfortable with the financial position and the company

has no equity financing plan. We lower our FY15/FY16 EPS by 6.5%/8% after

trimming profit forecasts for JCEs as some project companies will be dissolved after

completion. Overall positive outlook remains intact with >20% EPS growth in both

2015 and 2016. Reiterate BUY with a DCF-based target price of HK$17.50 (previous:

HK$19.00) (16.3x 2015E PER, 9.5% WACC, 2% terminal growth). Potential share

price catalysts include the next round of asset injection and major breakthrough in

projects related One-Belt One Road (OBOR).

CHINA CEMENT WEEKLY - Average cement price (nationwide) down 0.98% week-

on-week to RMB295/tonne. Cement prices in Zhejiang, Fujian, Hunan, Yunnan and

Gansu down RMB10~50/tonne. Recently we have seen more cement players trying

to develop overseas business, such as Huaxin Cement [600801.SH] and Anhui

Conch [0914.HK]. CR Cement [1313.HK] is also recruiting talents to prepare for

overseas investment. Due to limited demand growth in China and the country’s One-

Belt One-Road strategy, we may see more players to go for overseas expansion.

However, initial business contribution is likely to be limited due to potential risks in

politics, business culture, etc.

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ZCSR [3898.HK]

Steve Wong

(852) 3698-6391

stevewong@chinastock.com.hk

Wong Chi Man - Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Capital Goods Beat market expectation with GPM improvement; Reiterate

BUY

BUY (Unchanged)

Close: HK$ 45.25 (Mar 20, 2015)

Target Price: HK$53.75 (18.8%)

Share Price Performance

Market Cap US$6,819m

Shares Outstanding 1,176m

Auditor Ernst & Young

Free Float 48.19%

52W range HK$54.35-20.66

3M average daily T/O US$28m

Major Shareholding CSR [1766 HK]

(51.81%)

March 23, 2015

ZCSR announced FY14 results during the weekend. Revenue was amounted to

RMB12.7bn, up 43% year-on-year (YoY), beating consensus by 9%. Gross profit

margin (GPM) was up 2.2ppt YoY to 37.4% in FY14 mainly due to the change of

product-mix with high contribution of MUs and locomotive products. Net margin

improved 2.3ppt YoY to 19%, and net income amounted to RMB2.4bn in FY14,

up 63% YoY, beating consensus by 12%. ZCSR maintained net cash position of

RMB 2.6bn at end-2014. More information and guidance on the impact from mer-

ger of CSR and CNR is expected from the analyst briefing today. Maintain BUY .

Recovery of MUs and locomotive. Sales of MUs product were up 106%

YoY in FY14 due to the resumption of procurement from CRC since 2H13.

Segment revenue rebounded in 1H14 with total amount remained stable in

2H14 (edged down 4% YoY in 2H14). Sales of locomotive product were up

27% YoY in FY14, with accelerating sales (up 43% YoY) in 2H14. Sales of

metro products were up 26% YoY in FY14 and accelerating (up 32% YoY) in

2H14. Overall revenue growth slowed from 1H14, distorted by low-base of

1H13, but the growth momentum was still high (up 20% YoY in 2H14).

GPM improvement. GPM was up 2.2ppt YoY to 37% in FY14 (and up 4.5ppt

YoY in 2H14), thanks to the product-mix change. We believe the increase in

contribution of locomotive electrical systems and MUs were the major cause

of the margin improvement. We estimate the GPM for locomotive and MUs

segments are ~40%, higher than the group average at ~37%.

Maintain good financial position and reiterate BUY. ZCSR maintained a

net cash position at end-2014. Total net cash amounted to RMB2.6bn, which

provided the group with enough financial resources for acquiring electrical

component assets from CNR group. More information and guidance on the

impact from merger of CSR and CNR is expected from the analyst presenta-

tion today. Maintain BUY.

Analyst briefing on March 23 (today) at 4:30 p.m. HK time. Venue: Clif-

tons Hong Kong, Level 5, Hutchison House, 10 Harcourt Road, Central,

Hong Kong.

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Figure 1: Financial summary

Sources: Company, CGIHK Research

Finanancial summary 1H13 2H13 FY13 1H14 2H14 FY14 FY14 2H14

(% YoY) (% YoY)

Operating revenue (RMBm) 2,624 6,232 8,856 5,180 7,496 12,676 43.13 20.28

Locomotives electrical systems 811 2,095 2,906 716 2,988 3,704 27.46 42.63

EMUs electrical systems 314 2,001 2,315 2,830 1,929 4,759 105.57 (3.60)

Metro electrical systems 421 535 956 504 704 1,208 26.36 31.59

Other train-borne systems 672 1,002 1,674 739 984 1,723 2.93 (1.80)

Electric components and others 406 599 1,005 391 891 1,282 27.56 48.75

Business taxes & surcharges (RMBm) 21 54 75 30 70 100 33.33 29.63

Revenue (RMBm) 2,603 6,178 8,781 5,150 7,426 12,576 43.22 20.20

Less: Operating cost (RMBm) 1,628 4,067 5,695 3,324 4,552 7,876 38.30 11.93

Gross Profit (RMBm) 975 2,111 3,086 1,826 2,874 4,700 52.30 36.14

GPM (%) 37.46 34.17 35.14 35.46 38.70 37.37 2.23ppt 4.53ppt

Selling cost (RMBm) 131 367 498 275 606 881 76.91 65.12

Administrative cost (RMBm) 366 639 1,005 494 855 1,349 34.23 33.80

SG&A (RMB mn) 497 1,006 1,503 769 1,461 2,230 48.37 45.23

SG&A-to-revenue (%) 19.09 16.28 17.12 14.93 19.67 17.73 0.62ppt 3.39ppt

Net profit (RMBm) 400 1,067 1,467 857 1,538 2,395 63.26 44.14

Net profit margin (%) 15.37 17.27 16.71 16.64 20.71 19.04 2.34ppt 3.44ppt

Total debt (RMBm) 66 83 60 42 (49.40) (49.40)

Total cash and equivalents (RMBm) 1,583 3,136 2,729 2,680 (14.54) (14.54)

Net debt (cash) (RMBm) (1,517) (3,053) (2,669) (2,638) (13.59) (13.59)

Total equity (RMBm) 6,307 9,150 9,656 11,171 22.09 22.09

Net gearing (%) (24.05) (33.37) (27.64) (23.61) N/A 9.75ppt

4

Hilong Holding [1623.HK]

Hilong’s 2014 net profit came in at RMB398m. Excluding an one-off tax refund of

RMB38.4m in 1H14 and adding back non-cash expenses on CB, options and swap

for both 2013 and 2014, recurring net profit in 2014 was RMB375m (-12% YoY), or

13% above our estimates as Hilong capitalized RMB24m of interest expenses (21%

of total). The results imply a recurring net profit decline of 6% YoY in 2H14, versus a

drop of 21% in 1H14. Hilong declared dividend of HK$0.05 per share, implying pay-

out ratio of ~17% (down from 29-30% over the past three years). We are concerned

about the 31% increase in the trade receivables (versus a 5% revenue growth), with

past due jumped 43% YoY. On the positive side, we are encouraged by the strong

sales in overseas market and resilient oilfield services segment. Our earnings esti-

mates, TP and rating are under review.

Solid oil equipment manufacturing and services segment helped by higher

drill pipe sales in overseas. Drill pipe sales volume in 2014 reached 39,498t (+14% YoY), beating our estimate by 3.5%. Sales volume in 2H14 increased by

28% YoY to 21,377t (above company target of 20,000t), mainly driven by the

strong growth of international sales (mainly in America market) in 2H14 (+113%

YoY), more than offset a 17% decline in domestic market. ASP slightly dropped

1.4% YoY (-3.4% HoH) in 2H14 with full year ASP stayed flat YoY. OCTG coating

services revenue moderately increased by 8.6% YoY in 2H14, due to the weak-

ness in domestic market that dragged its growth. EBIT of the segment as a whole

dropped 10% YoY in 2H14 due to margin pressure.

Oilfield services segment still on a good growth trajectory. This is the best

performing segment with revenue increased by 23% YoY in 2H14, accelerated

from 13% in 1H14. Segment EBIT increased by 17% YoY in 2H14. Growth was

driven by new drill rigs commencement with high day rates and the increase in

revenue from OCTG trading business.

Rising receivable days a concern. Trade receivables increased by 31% YoY to

RMB1,535m as of end-2014, implying 192 days of receivables versus 165 days

as of end-2013. Most importantly, RMB522m (34% of the trade receivables) were

past due but not impaired. In particular, 39% of the RMB522m have not paid for

more than one year. We are increasingly concerned about this issue.

Analyst meeting at 10:00 a.m. (HK time) today. Venue: Ballroom C, Level 5,

Island Shangri-La Hotel, Pacific Place, Supreme Court Road, Hong Kong.

Upside risks: (1) Oil price recovery; (2) Drilling demand recovery; (3) More

new order intakes. Downside risks: (1) Further capex cut by oil companies; (2) Potential suspension on drill rigs operation by customers; (3) Margin

squeeze; (4) Rising receivables

Wayne Fung, CFA —Analyst

(852) 3698-6319

waynefung@chinastock.com.hk

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Oilfield Services Sector 2014 results above estimates but a low quality beat; Rising

receivables a concern

HOLD (Under review)

Close: HK$1.95 (Mar 20, 2015)

Target Price: HK$2.52 (Under review)

Share Price Performance

Market Cap US$424m

Shares Outstanding 1,695m

Auditor PWC

Free Float 34%

52W range HK$1.61-5.62

3M average daily T/O US$0.8m

Major Shareholding ZHANG Jun

(Chairman and CEO)

(60%)

March 23, 2015

5

Figure 1: Hilong results highlights

Sources: Company, CGIHK Research estimates

Results highlights 1H13 1H14 Chg (YoY) 2H13 2H14 Chg (YoY) 2013 2014 Chg (YoY) Comments

(RMB m)

Oilfield equipment manufacturing and services

Revenue 575 589 2% 639 681 7% 1,214 1,270 5% Drill pipe revenue +4.6% YoY.

Cost of sales (300) (350) 17% (344) (345) 0% (644) (696) 8% OCTG coating services revenue +4.8% YoY.

Gross profit 276 239 -13% 295 336 14% 570 575 1%

Gross margin 47.9% 40.6% 46.1% 49.3% 47.0% 45.3% Gross margin improved in 2H14.

Operating expenses (211) (130) -38% (134) (191) 42% (345) (321) -7%

Opex ratio 36.7% 22.0% 21.0% 28.1% 28.4% 25.3%

EBIT 65 109 69% 160 144 -10% 225 254 13%

EBIT margin 11.2% 18.6% 25.1% 21.2% 18.5% 20.0%

Line pipe technology and services

Revenue 173 120 -31% 192 152 -21% 365 272 -26%

Cost of sales (131) (77) -42% (135) (107) -20% (266) (184) -31%

Gross profit 42 43 4% 58 44 -23% 99 88 -12%

Gross margin 24.1% 36.1% 29.9% 29.2% 27.1% 32.3%

Operating expenses (24) (21) -14% (17) (14) -18% (41) (35) -15%

Opex ratio 14.1% 17.6% 8.7% 9.0% 11.3% 12.8%

EBIT 17 22 29% 41 31 -25% 58 53 -9%

EBIT margin 10.0% 18.5% 21.2% 20.2% 15.9% 19.5%

Oilfield services

Revenue 417 473 13% 456 560 23% 873 1,032 18%

Cost of sales (253) (307) 21% (301) (368) 22% (554) (675) 22%

Gross profit 164 166 1% 155 191 24% 318 357 12%

Gross margin 39.3% 35.0% 33.9% 34.2% 36.5% 34.6%

Operating expenses (50) (53) 5% (47) (62) 32% (97) (115) 18%

Opex ratio 12.0% 11.2% 10.4% 11.2% 11.2% 11.2%

EBIT 114 113 -1% 107 126 17% 221 239 8%

EBIT margin 27.3% 23.9% 23.6% 22.5% 25.3% 23.1%

Offshore engineering services

Revenue 0 0 n/a 0 2 n/a 0 2 n/a

Cost of sales 0 0 n/a 0 (1) n/a 0 (1) n/a

Gross profit 0 0 n/a 0 1 n/a 0 1 n/a

Gross margin 0.0% n/a 0.0% 70.6% 0.0% 70.6%

Operating expenses 0 (6) n/a 0 (5) n/a 0 (11) n/a

Opex ratio 0.0% n/a 0.0% 280.0% 0.0% 635.8%

EBIT 0 (6) n/a 0 (4) n/a 0 (10) n/a

EBIT margin 0.0% n/a 0.0% -209.5% 0.0% -565.3%

Total

Revenue 1,165 1,182 1% 1,287 1,394 8% 2,452 2,576 5%

Cost of sales (684) (734) 7% (780) (822) 5% (1,464) (1,555) 6%

Gross profit 481 448 -7% 507 573 13% 988 1,021 3% Gross margin rebounded in 2H14.

Gross margin 41.3% 37.9% 39.4% 41.1% 40.3% 39.6%

Operating expenses (285) (210) -26% (199) (272) 37% (484) (482)

EBIT 196 238 22% 309 297 -4% 504 536 6%

D&A 63 83 32% 73 82 11% 136 164 21%

EBITDA 259 321 24% 382 379 -1% 640 700 9%

Finance income 5 1 n/a 4 12 218% 8 13 54%

Finance costs (34) (51) 49% (37) (39) 6% (71) (90) 26% RMB24m of interest payment was capitalized in 2014.

Profit/(loss) of associates/JCE (5) 2 n/a 6 1 -89% 1 3 287%

Pretax profit 161 191 19% 281 270 -4% 442 462 4%

Income tax expenses (43) (2) -95% (29) (45) 56% (72) (47) -35%

After tax profit 118 189 60% 252 226 -11% 371 415 12%

Minority interests (15) (10) -32% (11) (7) -33% (26) (17) -32%

Net profit 103 179 73% 241 218 -9% 345 398 15%

Recurring net profit 177 141 -21% 248 234 -6% 425 375 -12% Recurring net profit is adjusted for the one-off tax effect.

Revenue decline was due to weakness line pipe

coating segment despite strong growth of CRA lined

pipe sales (accounted for 27% of the segment

revenue).

Income tax decline was due to one-off tax refund of

RMB38m in 1H14.

Contribution of pipe laying vessel will start contribution

in 2015.

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Figure 2: Hilong drill pipe segment higlights

Sources: Company, CGIHK Research

Revenue (RMB m) 2007 2008 2009 2010 2011 2012 2013 2014

Drill pipes and related products

Drill pipes

Breakdown by region

China

Sales volume (t) 15,839 21,900 11,314 14,469 14,549 22,194 20,997 15,397

Change YoY - 38.3% -48.3% 27.9% 0.6% 52.5% -5.4% -26.7%

ASP (RMB/t) 30,941 25,493 26,357 24,961 28,357 24,954 23,280 22,427

Change YoY - -17.6% 3.4% -5.3% 13.6% -12.0% -6.7% -3.7%

Revenue (RMB m) 490 558 298 361 413 554 489 345

Change YoY - 13.9% -46.6% 21.1% 14.2% 34.2% -11.7% -29.4%

Overseas

Sales volume (t) 4,419 17,120 3,961 10,550 13,059 15,213 13,665 24,101

Change YoY - 287.4% -76.9% 166.3% 23.8% 16.5% -10.2% 76.4%

ASP (RMB/t) 35,931 37,830 29,395 25,842 25,267 24,541 23,401 23,745

Change YoY - 5.3% -22.3% -12.1% -2.2% -2.9% -4.6% 1.5%

Revenue (RMB m) 159 648 116 273 330 373 320 572

Change YoY - 307.9% -82.0% 134.2% 21.0% 13.1% -14.3% 79.0%

Drill pipe total

Sales volume (t) 20,258 39,020 15,275 25,019 27,608 37,407 34,662 39,498

Change YoY - 92.6% -60.9% 63.8% 10.3% 35.5% -7.3% 14.0%

ASP (RMB/t) 32,030 30,906 27,145 25,333 26,895 24,786 23,328 23,231

Change YoY - -3.5% -12.2% -6.7% 6.2% -7.8% -5.9% -0.4%

Drill pipe revenue (RMB m) 649 1,206 415 634 743 927 809 918

Change YoY - 85.9% -65.6% 52.9% 17.2% 24.9% -12.8% 13.5%

Drill pipe components 0 0 0 21 94 27 83 30

Hardbanding 0 14 14 25 16 12 13 16

Equipment 13 18 34 1 11 16 1 0

Others 8 24 56 32 41 29 45 30

Total 670 1,261 519 713 904 1,011 951 994

Change YoY - 88.2% -58.9% 37.5% 26.7% 11.9% -6.0% 4.6%

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Figure 3: Hilong revenue breakdown by regions

2013 2014

Sources: Company, CGIHK Research

China35%

North and South America

35%

Russia, Central Asia and East

Europe11%

West Africa8%

Middle East6%

South Asia and others

5%

China50%

North and South America

25%

Russia, Central Asia and East

Europe10%

West Africa9%

Middle East3%

South Asia and others

3%

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March 23, 2015

Slight margin improvement; debt level under control. The company’s 2014

revenue rose 26.2% to HK$34.4bn. Revenue related to affording housing projects

jumped 33% to HK$8.7bn while revenue from Hong Kong cash construction pro-

jects surged 37% to HK$15.3bn. Hong Kong and China business accounted for

44.4% and 45.1% of total revenue, respectively. Overall gross margin improved

from 13.7% in 2013 to 13.8% in 2014. Net debt/equity ratio rose from 28.4% in

2013 to 36.8% in 2014 (still below the company’s internal threshold of 40%), partly

due to the HK$2bn investment in Macau Nova City Phase 5.

Margin likely to continue to improve in 2015. Gross margin of Hong Kong cash

construction business was 6.6% in 2014 (7.3% in 2013) while that of Macau pro-

jects was 4.3% (2013: 14.8%). Lower margin was attributed to the construction

progress of a few newly started major projects, which failed to meet the 30% com-

pletion threshold. Management expects these projects to meet the 30% threshold

in 2015 and will start profit booking. We forecast the company’s gross margin to

increase from 13.8% in 2014 to 14.1% in 2015E.

No equity financing plan. As buy-back payment received for BT projects will con-

tinue to increase in 2015 (2014: HK$3bn), the company does not have any equity

financing plan, on the back of an undrawn credit line of HK$16.8bn. Management

expects net debt/equity to stay below 40%. (more on next page)

Investment Highlights

China State Construction International (CSCI)[3311.HK]

CSCI reported net profit of HK$3.46bn for 2014, up 25.7% year-on-year (YoY) (EPS

growth: 21.9%), in line with market consensus and our forecast. The company re-

ceived buy-back payment of HK$3bn for its BT projects and recorded operating cash

inflow of HK$2.4bn (2013: HK$1.86bn). Based on current project pipeline, manage-

ment feels comfortable with its financial position and confirm there is no equity financ-

ing plan. We lower our FY15/FY16 EPS by 6.5%/8% after trimming profit forecasts

for JCEs as some project companies will be dissolved after completion. Overall posi-

tive outlook remains intact with >20% EPS growth in both 2015 and 2016. Reiterate

BUY with a DCF-based target price of HK$17.50 (previous: HK$19.00) (16.3x 2015E

PER, 9.5% WACC, 2% terminal growth). Potential share price catalysts include the

next round of asset injection and major breakthrough in projects related One-Belt

One Road (OBOR).

BUY

Close: HK$10.64 (Mar 20, 2015)

TP: HK$17.50 (+64%)

FY14 EPS grew 22%; Valuation near low-end of the range

Price Performance

Market Cap US$5,504m

Shares Outstanding 4,012m

Auditor PWC

Free Float 41.3%

52W range $10.52-$14.16

3M average daily T/O

(US$m) 9.6

Major Shareholding China Over-

seas Holding

(58.3%)

Source: Bloomberg

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Nevin Ning—Analyst

(852) 3698-6321

nevinning@chinastock.com.hk

Source: Bloomberg, CGIHK Research

Construction Sector

HK$ m 2011 2012 2013 2014 2015E 2016E

Revenue 16,379 21,911 27,286 34,440 43,359 50,862

Net profit 1,507 2,131 2,750 3,457 4,298 5,311

Net margin 9.2 9.7 10.1 10.0 9.9 10.4

EPS (HK$) 0.42 0.55 0.71 0.86 1.07 1.32

Change (%) 21.0 30.4 28.0 21.9 24.3 23.6

P/E 25.1x 19.3x 15.x 12.3x 9.9x 8.x

Yield 1.1% 1.5% 2.0% 2.4% 3.0% 3.7%

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Studying business opportunities related to OBOR. The company sees business opportunities related

to OBOR: (i) domestic market: mainly in central and west China and (ii) overseas: mainly in high-speed rail

and other infrastructure projects. It is working closely with the parent company to study potential opportuni-

ties and more information will be provided if there is further progress.

To keep 12% IRR threshold for PPP projects. As the central government is encouraging Public-Private

Partnership (PPP), CSCI will consider participation in these projects but will not lower its investment

threshold of 12% IRR. Overall, management believes the move to push for PPP projects is positive as it

will better align the interests between local governments and investors from the private sector.

Limited impact of rate cut. Management does not expect the interest rate cut in China and a potential

rate hike in the US will have significant impact on the profitability of BT projects. Interest income from earn-

ing the interest rate spread is not a major part of the earnings, according to the company. It will manage

the potential risk through (i) securing long-term loans to reduce the risk of interest rate fluctuations and (ii)

negotiating with local governments to secure a pre-determined rate of return for BT projects.

No updates on asset injection. The company reiterates that the assets to be injected will have synergies

with its existing business.

Valuation near low-end of the range. CSCI is trading at 9.9x 2015E PER, near –1 standard deviation of

the trading range (see next page). With >20% EPS growth in each year of 2015 and 2016, the valuation

looks appealing, in our view.

HK$ m 2013 2014

YoY change

(%)

Revenue

BT - affordable housing 6,551 8,709 33

BT & BOT - infrastructure 5,369 5,388 0

Operations of infrastrcture assets 1,569 1,500 (4)

Cash construction - HK 11,134 15,285 37

Cash construction - Macau 836 2,256 170

Far East Global (0830.HK) 1,341 1,382 3

Gross profit

BT - affordable housing 1,212 1,751 44

BT & BOT - infrastructure 1,165 1,196 3

Operations of infrastrcture assets 631 675 7

Cash construction - HK 813 1,009 24

Cash construction - Macau 124 97 (22)

Far East Global (0830.HK) 9 88 842

Gross margin

BT - affordable housing 18.5% 20.1%

BT & BOT - infrastructure 21.7% 22.2%

Operations of infrastrcture assets 40.2% 45.0%

Cash construction - HK 7.3% 6.6%

Cash construction - Macau 14.8% 4.3%

Far East Global (0830.HK) 0.7% 6.4%

Figure 1: Performance by segment

Sources: Company, CGIHK Research

10

Key Financials

Source: Company, CGIHK Research (Note: 2013 figures are restated.)

Figure 2: Rolling forward PER range

Sources: Bloomberg, CGIHK Research

P ro fit & lo ss (H K$ m) 2011 2012 2013 2014 2015E 2016E C ash f lo w (H K$ m) 2011 2012 2013 2014E 2015E 2016E

R evenue 16,379 21,911 27,286 34,440 43,359 50,862 Profit before tax 1,844 2,541 3,174 4,048 5,217 6,464

Cost of sales (14,581) (19,192) (23,540) (29,696) (37,265) (43,336) Depreciation and amortization 85 112 120 245 269 299

Gro ss pro f it 1,798 2,718 3,746 4,743 6,094 7,526 Tax paid (61) (127) (116) (660) (887) (1,099)

Other income 86 132 150 291 347 407 Change in working capital (2,418) (5,216) (6,304) 812 (2,110) 617

SG&A (554) (740) (1,042) (1,033) (1,257) (1,475) Other operating cash flow (454) (651) (133) (4,112) (60) (4,401)

Other expenses (23) 0 0 0 0 0 Operat ing cash f lo w (1,004) (3,340) (3,259) 333 2,429 1,880

EB IT 1,307 2,110 2,854 4,001 5,184 6,458 Capex (522) (402) (378) (409) (429) (442)

EB IT D A 1,392 2,384 3,149 4,298 5,498 6,793 Net (acquisitions)/disposal (13) (61) (228) 0 0 0

Finance costs (193) (239) (418) (456) (542) (619) Other investing cash flow 372 6 707 135 146 169

Investment income 316 239 286 184 212 253 Invest ing cash f lo w (164) (457) 100 (274) (283) (273)

Share of asso/JCEs 394 432 452 318 362 372 Change in debt 731 3,682 5,736 750 2,250 1,250

Profit before tax 1,844 2,541 3,174 4,048 5,217 6,464 Net share issues 3,552 2,230 0 0 0 0

Income tax expenses (334) (405) (503) (660) (887) (1,099) Dividends paid (430) (617) (703) (1,027) (1,289) (1,593)

Profit after tax 1,510 2,137 2,671 3,388 4,330 5,365 Other financing cash flow (958) (341) (740) (456) (542) (619)

M inority interest 3 5 (79) (70) 32 54 F inancing cash f lo w 2,894 4,953 4,294 (733) 418 (963)

N et pro f it 1,507 2,131 2,750 3,457 4,298 5,311 Forex effect/others 4 4 146 0 0 0

EPS (HK$) 0.42 0.55 0.71 0.86 1.07 1.32 N et change in cash 1,730 1,160 1,135 (674) 2,565 645

DPS (HK$) 0.12 0.16 0.21 0.26 0.32 0.40

Key rat io s 2011 2012 2013 2014 2015E 2016E

B alance sheet (H K$ m) 2011 2012 2013 2014 2015E 2016E Sales growth (%) 36.7 33.8 24.5 26.2 25.9 17.3

Cash & cash equivalent 5,594 6,875 8,126 7,452 10,017 10,662 Gross profit growth (%) 36.7 51.2 37.8 26.6 28.5 23.5

Inventories 150 185 163 160 255 297 Net profit growth (%) 45.5 41.4 29.0 25.7 24.3 23.6

Accounts reveivables 5,029 7,109 10,024 12,542 16,037 18,812 EPS growth (%) 21.0 30.4 28.0 21.9 24.3 23.6

Other current assets 3,885 6,995 10,739 14,175 6,802 5,455 Gross profit margin (%) 11.0 12.4 13.7 13.8 14.1 14.8

T o tal current assets 14,658 21,164 29,053 34,330 33,112 35,226 Net profit margin (%) 9.2 9.7 10.1 10.0 9.9 10.4

Fixed assets 1,870 2,191 2,672 2,827 2,966 3,108 ROAA (%) 6.6 6.6 6.1 5.8 6.4 7.3

Goodwill & intangibles 10 830 804 778 778 778 ROAE (%) 15.9 15.8 17.3 17.4 18.8 20.0

Other non-current assets 10,367 13,649 19,921 28,644 31,644 37,292 Net-debt-to-equity (%) 6.9 22.9 28.4 36.8 30.6 28.6

T o tal no n-current assets 12,247 16,670 23,397 32,250 35,388 41,179 Inventory turnover (days) 3.7 3.5 2.5 2.0 2.5 2.5

Short-term debt 1,298 49 262 587 264 289 Receivable turnover (days) 112.1 118.4 134.1 132.9 135.0 135.0

Accounts paybles 5,307 7,152 13,020 17,261 18,377 21,371 Payable turnover (days) 132.8 136.0 201.9 212.2 180.0 180.0

Other current liabiltiies 5,144 5,896 9,480 13,372 8,887 8,776 Quick ratio (x) 0.9 1.1 0.8 0.7 0.8 0.8

T o tal current liabilit ies 11,749 13,097 22,761 31,221 27,528 30,436 Current ratio (x) 1.2 1.6 1.3 1.1 1.2 1.2

Long-term debt 4,961 9,996 8,600 10,362 12,935 14,160 Interest-coverage ratio (x) 6.8 8.8 6.8 8.8 9.6 10.4

Other non-current liabilities 698 888 4,902 4,999 4,999 4,999

T o tal no n-current liabilit ies5,659 10,884 13,502 15,360 17,934 19,159

Share capital 90 97 97 100 100 100 Key assumptio ns 2011 2012 2013 2014 2015E 2016E

Reserve 9,401 13,413 15,836 19,730 22,739 26,456 New contract (HK$ m)* 30,280 34,070 43,700 58,280 68,493 74,092

Shareho lders' equity 9,490 13,510 15,934 19,830 22,839 26,557 Backlog (HK$ m) 48,920 55,870 74,148 90,520 118,207 144,299

M inority interests 7 343 253 168 199 253 Backlog-to-sales ratio (x) 3.0 2.7 2.9 2.7 2.8 2.9

T o tal equity & liabilit ies 26,905 37,835 52,450 66,579 68,499 76,404 * Contribution from Far East Global is not included.

B VP S (H K$ ) 2.67 3.50 4.10 4.94 5.69 6.62

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Rolling forward PER (x) Average

+1 Standard deviation -1 Standard deviation

11

China Cement Weekly

March 23, 2015

Nevin Ning—Analyst

(852) 3698-6321

nevinning@chinastock.com.hk

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Demand Picked Up Gradually Post-CNY; Trial of

overseas expansion is warming up

Cement prices drop 0.98% last week. Average cement price (nationwide) down 0.98%

week-on-week to RMB295/tonne. Cement prices in Zhejiang, Fujian, Hunan, Yunnan and

Gansu down RMB10~50/tonne. Average inventory level (nation-wide) declined slightly

to 75.18% last week. Daily shipment in majority regions still kept at below 60% of normal

level. It is expected that a full-fledged demand recovery would not come until early April.

Coal prices continued to drop last week. Comprehensive average price index for Bohai-

Rim Steam Coal (Q5500K) dropped RMB6/tonne last week to RMB482/tonne. The index

was 9.6% lower on year-on-year (YoY) basis.

Trial of overseas expansion is warming up. Huaxin Cement [600801.SH,NR] has

recently acquired another 28% of the stakes of CCC, a Cambodia cement company. CCC is

building a 3200t/d new dry cement clinker production line. This acquisition enabled Huaxin

to raise its stake to 68%, making it an absolute controlling shareholder, and therefore help

facilitate formal operation of that new clinker line (previously set to put into operation in

2H14, but the actual progress was delayed). As organic growth usually takes years to

complete, cooperation with local cement players or overseas expansion through M&A have

gradually been adopted by domestic cement players, which help reduce project lead time,

political interference and execution risk. We have seen some industry players got a first

mover advantage in their overseas business, including Anhui Conch [0914.HK; HOLD],

which already built a 3200t/d clinker line in Indonesia and just signed a strategic cooperation

agreement with Bank of China under “One-Belt One-Road” project, with credit facility

provision of no more than US$5bn. CR Cement [1313.HK; HOLD] is also considering talent

recruitment for its potential overseas plan. As overseas expansion has its inherent risks, we

may expect to see more trials of relatively small scale at this warm-up stage.

Cement stocks under our coverage up 6.3% last week. Overall sector performed well

last week, probably due to more news flow regarding infrastructure investment plan and

“One-Belt One-Road” project. The best performer was Shanshui Cement [0691.HK;

SELL], up 16.4%. CR Cement [1313.HK; HOLD] was the weakest one, also up 1.9%.

China Cement Sector

Sources: Company, Bloomberg, CGIHK Research estimates

Valuation Table

Net debt/equity (%)

Company Ticker Rating Price (HK$) Market cap (US$m) 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2014E

Anhui Conch 914 HK Equity HOLD 27.70 18,361 12.3 10.7 13.3 2.1 1.8 1.6 7.2 6.4 7.3 10

CNBM 3323 HK Equity BUY 7.58 5,247 5.6 5.4 4.8 0.9 0.8 0.7 8.3 7.2 6.8 264

BBMG 2009 HK Equity BUY 6.58 6,816 7.6 7.4 6.5 1.0 0.8 0.7 8.1 6.5 6.1 46

CR Cement 1313 HK Equity HOLD 4.36 3,652 8.7 6.6 7.9 1.1 1.0 0.9 7.0 5.6 6.2 56

Shanshui Cement 691 HK Equity SELL 5.82 2,521 13.1 34.5 37.9 1.7 1.4 1.4 8.6 9.8 9.5 131

Simple average 9.5 12.9 14.1 1.4 1.2 1.1 7.8 7.1 7.2 102

Weighted average 10.1 10.5 12.0 1.6 1.4 1.2 7.6 6.7 7.1 66

PER (x) PBR (x) EV/EBITDA(x)

2013 -2015E PEG(x)

Company Ticker 2014E 2015E CAGR (%) 2014E 2013 2014E 2015E 2013 2014E 2015E

Anhui Conch 914 HK Equity 14.0 (18.2) (3.5) (3.1) 18.2 18.0 13.0 1.6 1.9 1.5

CNBM 3323 HK Equity 3.1 10.0 6.5 0.8 17.5 15.7 15.1 2.7 2.8 3.1

CR Cement 1313 HK Equity 31.3 (15.8) 5.1 1.3 14.1 16.2 12.3 2.4 3.9 3.2

BBMG 2009 HK Equity 2.2 11.1 6.5 1.1 12.0 11.6 11.1 1.9 1.8 2.0

Shanshui Cement 691 HK Equity (62.3) (7.6) (41.0) (0.8) 11.1 4.5 3.8 1.6 0.6 0.5

Simple average (2.4) (4.1) (5.3) (0.1) 14.6 13.2 11.1 2.0 2.2 2.1

Weighted average 6.7 (7.8) (1.9) (1.1) 16.1 15.3 12.2 1.9 2.1 1.9

EPS Growth (%) ROE (%) Dividend yield (%)

12

1-Year Relative Performance

Sources: Capital IQ, CGIHK Research

13

Figure 1: Regional Cement Price

Sources: Digital Cement, CGIHK Research

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :