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Author: kimeng   |   Latest post: Wed, 17 Apr 2019, 9:31 PM

 

Anhui Conch (914 HK/600585 CH): Along With the Market

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  • Share market higher; cement price slightly up
  • Property slowdown but more infra spending
  • To move in line with cement prices

Moving With the Market With Some Increase in Cement Prices

Since our earlier report on 30 Oct, the share prices of Anhui Conch have seen a decline in the last two months of 2018 followed by a recovery in 2019, such that the H-share is now about 10% higher and the A-share is about 5.5% higher. In comparison, the Hang Seng Index has appreciated by about 13.8% while the Shanghai Composite Index is about 1.8% higher.

Cement price growth since then has varied depending on the region, but the general trend is a slight increase – the national average is up about 1.4%, led by the North-eastern (4.5%), Northern (3.9%) and Southern (3.9%) regions.

Monitoring Sustainability of Cement Price Growth

Recall that the group earlier issued a positive profit alert indicating its FY18 net profit would increase by 80-100% YoY; prior to this announcement the street was already forecasting an 83% increase for the year. The main driver should be the average selling price for its products, with the cement price surge (refer to exhibits) especially in the group’s major sales markets of Eastern and Southern China. Sales volume growth in comparison should be more stable (likely single digit increase) due to the tight supply controls in the industry post an earlier overcapacity problem.

Street Estimating a 4.6% Fall in FY19 Earnings

Looking ahead the market would likely look for cues on sustainability of cement price growth, and Anhui Conch as an industry proxy should move in line with China cement prices. Though there are concerns over a property slowdown which would weigh on cement demand, there are hopes that stronger infrastructure demand would support cement prices going forward.

Meanwhile the street is estimating a 4.6% fall in Anhui Conch’s earnings for FY19 for now, while we are looking at -3%. Based on 1.6x FY19F book (5-yr historical average is 1.5x), we derive fair value estimates of HK$43.58 and RMB32.21 for the Hand A-shares, respectively.

Risks include pricecaps on cement prices given the earlier surge, weaker-than-expected demand from property developers and delay in infrastructure spending, as well as M&A risks.

Source: OCBC Research - 8 Feb 2019

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