• Net earnings continue to be strong
• Property slowdown, potential price caps?
• But beneficiary of more infra spending

Delivers Solid Earnings But Not Immune to Broad Market Sell-down

Anhui Conch (914 HK/600585 CH) recently reported a 76.8% YoY rise in revenue to RMB32b and a 151% increase in net profit to RMB7.8b in 3Q18, bringing 9M18 net profit to RMB20.7b which was a solid set of results.

Cement prices remain strong, especially in eastern China, backed by property starts. Meanwhile, cement supply remained low with earlier production halts in the region.

Results were also boosted by nonoperating income and interest income. Despite this, the H-share dropped 5.4% and the A-share fell 6.3% the day after results were released, along with the broad market sell-down.

Concerns Over Potential Price Caps +property Slowdown, But Boost From Infra Spending

Prior to the release of the 3Q results, the Hshare was down about 23% from its peak around end Jul this year, while the A-share was down about 18%. This compares to the HSI’s 12% drop and SHCOMP’s 9.6% fall over the same period.

Given how cement prices have risen, there have been concerns about the possibility of the Chinese government imposing price caps, which may have contributed to weakness in its share price. Concerns over a property slowdown could have also weighed on cement stocks.

On the other hand, demand support could come from an increase in infrastructure spending from government policies.

Cement Prices to Remain Supported

With the broader market weakness, valuations have also come off with higher risk premia. As such, we lower our P/B from 1.95x to 1.4x (slightly lower than five-year historical average of 1.5x) and as such as our fair value estimate drops to HK$38.05 for the H-share and RMB29.42 for the A-share.

Looking ahead, we still expect cement prices to stay supported or even increase further in 4Q, driven by the generally low inventory level and stronger demand during the peak season.

Besides price caps, key risks 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

Source: OCBC Research - 30 Oct 2018