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Author: kimeng   |   Latest post: Wed, 19 Jun 2019, 9:13 AM

 

Anhui Conch (914 HK/600585 CH): Authorities Eyeing the Sector Again

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  • FY18 results in line
  • Authorities to look into cement prices
  • Rolling valuations forward

FY18 Results Within Expectations

Anhui Conch delivered a 70.5% increase in revenue to RMB128.4b and an 88.1% increase in net profit to RMB29.9b in FY18, such that results were generally within expectations. The group had earlier issued a positive profit alert indicating its FY18 net profit would increase by 80-100% YoY; prior to the profit alert announcement the street was already forecasting an 83% increase for the year. A final dividend of RMB1.69 per share was declared, compared to RMB1.20 last year.

Potential Price Investigations on Market Players

Recently, there was news that the government authorities (NDRC) will be meeting with various agencies such as local industry associations, property developers and cement companies to gather information on current market conditions in the cement market, and there could be investigations in cement pricing by market players.

As mentioned in our earlier reports, price caps is a potential risk due to the cement price surge, although the price increase is arguably driven by fundamentals to a large extent (lower supply due to market consolidation and environmental restrictions, as well as buoyant demand). It is hard to tell if anything negative would result from the investigation; after an alleged investigation in Oct 2018, cement prices continued to rise in 4Q18. However, should there be negative newsflow from the NDRC, this would weigh on stocks.

Monitoring Cement Prices

For Anhui Conch, 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.

The national average for China’s cement price has been easing in the first three months of this year after peaking in Dec last year (RMB415.2/MT in Mar 2019 vs. RMB447.6/MT in Dec 2018 for PC 42.5 cement).

Looking ahead, we roll forward our valuations to blended FY19/20F earnings, and our fair value estimate rises to HK$48.24 for the H-share, while the fair value estimate for the A-share rises to RMB37.11

Source: OCBC Research - 22 Mar 2019

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