• Unifying sales channels in East China
• Monitoring cement price growth ahead
• Earnings likely to remain strong

Unifying Sales Channels in East China

Anhui Conch recently disclosed that certain subsidiaries of the company located in East China will sell cement products to Jiangsu Conch Building Materials (JCBM). The aggregate transaction amount is estimated to be not more than RMB1.6b. JCBM is 51%-owned by Anhui Conch and 49% by Conch Profiles and Science, which is a subsidiary of Conch Holdings.

Conch Holdings is a controlling shareholder of Anhui Conch. Explaining this move, Anhui Conch said it will unify the sales of cement products of certain subsidiaries in East China to JCBM, which will in turn sell the cement products to end users along the Yangtze River region of East China.

This allows the subsidiaries to concentrate on production and JCBM to focus on leveraging on its centralized sales advantage, such that the latter grows to become a comprehensive building materials trading platform.

Street Still Cautious About 2019 Growth

The street is forecasting 71% earnings growth for this year and about 3% for 2019. To recap, the group’s earnings grew by 92% in 1H18, boosted by a substantial rise in composite selling prices. This led to an increase of 11.9 percentage points to 44.8% in gross profit margin.

Further improvement in the supply-and-demand conditions of the aggregate market benefiting from more stringent safety and environmental protection standards had supported prices.

Cement Prices Likely to Stay Supported

Looking ahead, cement prices are likely to stay supported or even increase further in 4Q, driven by the generally low inventory level and stronger demand during the peak season. Supported by recent construction starts, China’s average inventory level dropped to 55% as of mid Sep, which is the lowest level since May, according to Bloomberg.

We are likely to see strong earnings in the upcoming results due to higher cement prices on a YoY basis, but the market will likely monitor the sustainability of cement price growth on a QoQ basis. Key risks also include a potential slowdown in the property market, movements in coal price and power tariffs (affect production cost), as well as M&A transactions posing downside risk.

We fine-tune our estimates and our FV estimate slips slightly to HK$49.72 for the H-share and RMB36.75 for the A-share.

Source: OCBC Research - 2 Oct 2018