Market expectations are very low in the past year, the market unanimously gave Shanshui sell rating, and the company's share price outperformed the cement sector by 34%. This is mainly because the problem of overcapacity in Shandong, the core market of Shanshui (accounting for about 65% of the company's sales) and surrounding provinces, including Hebei and Henan, is more serious than expected.
The worst is over: the Shandong market returns to a better-than-expected infrastructure recovery this year. Only one key infrastructure project started in Shandong in 2013, while at least eight projects will start in 2014, three of which have already completed bids in the first quarter. This, coupled with the strong supply control in Shandong and Hebei after the strengthening of environmental protection policy, has significantly improved the relationship between supply and demand in Shandong. As a result, cement prices in Shandong began to rise as early as early March, one month earlier than we expected and normal seasonality.
The company's fundamentals are better than expected due to the recovery of demand and the supply compression of independent grinding stations, the daily shipment volume of Shanshui has exceeded the highest level of last year since the third week of March and entered the destocking stage. We expect sales to grow at an annual rate of about 20% in the first quarter, and there will be two more rounds of price increases in April, May and the second half of the year. At the same time, we believe that the worst of the company's balance sheet is over, and as capital expenditure falls, the net asset-liability ratio will decline in 2014.
We will raise the 2014 ton gross margin assumption from 68 yuan / ton to 70 yuan / ton, and the 2015 ton gross margin assumption from 68 yuan / ton to 75 yuan / ton. As a result, we raised our earnings forecasts for 2014 and 2015 by 12% respectively, which is 27% higher than the market consensus.
Low valuation Landscape is currently trading at 5.4 times 2014 forecast earnings, 303 yuan / ton, lower than the historical average forecast price-to-earnings ratio and ton market capitalization level 47super 21%. Based on a forecast price-to-earnings ratio of 7 times, we give the company a new target price of HK $4.60 (originally HK $4.10), corresponding to 34% of the current share price. We reaffirm our buy rating.