Main points of investment:
The Yangtze River Delta region already has the best relationship between supply and demand, mainly due to a significant reduction in new production capacity this year. We expect to add 21 million tons of capacity in 2013, a growth rate of 3.4%, which is significantly lower than the growth rate of 6.3% in 2011 (3.2 million tons). We expect demand to recover and the annual demand growth rate will rise to 10% from 6.5% in 2011.
Prices have risen more than expected. Asia's sales exposure in the Yangtze River Delta region is about 70%. Due to the improvement of supply and demand, the price of Ya Nai's main cement plant in Jiangxi / Hubei has increased by about 100x40 yuan per ton since February this year. We expect that Asia's gross profit per ton in May will increase from 28 yuan / ton in the first quarter to about 70 yuan / ton.
The rise in gross profit margin drives the company's profitability to improve the company's current low inventory level, which has been lower than a week at the main cement plant in Jiangxi / Hubei. We expect continued strong earnings in the coming months to drive up the share price. A change in gross margin of 5 yuan per ton will result in a profit change of about 13%. In order to reflect the higher-than-expected rise in cement prices, we have raised the 2013 ton gross margin assumption from 61 yuan / ton to 70 yuan / ton.
Valuation & target price: we raised our 2013 earnings forecast for Asia cement China by 25% to reflect a higher-than-expected gross margin of tons. Because of its good regional layout and high profitability, the current Asian cement China has upside risks. We reaffirm our buy rating and raise our target price from HK $4.8 to HK $5.6, corresponding to a price-to-earnings ratio of 8 times 2013 earnings.
Catalyst for stock price performance: the further rise in cement prices in the company's core area will be the catalyst for the stock price to rise.
Investment risk: including the reduction of new construction due to the upgrading of government real estate regulation and control
