Summary: we organized an Asia cement (China) conference call yesterday afternoon, and management expects the company's fundamentals to improve in 2013 due to higher cement prices, increased sales and the start of more infrastructure projects. Due to rising volume and stable costs, profitability in 2013 will increase significantly compared with 2012. We reaffirm our buy rating and maintain our target price of HK $4.8.
Contrary to popular perception: the commissioning of the new line and the resumption of demand will drive sales up by 1.5-2 million tons in 2013. management said that two clinker lines with a daily production capacity of 6000 tons in Yadong, Jiangxi, will be put into production by the middle and end of 2013, respectively. At the same time, the acceleration of infrastructure investment since the fourth quarter of 2012 has led to a recovery in cement demand. The combination of these two positive factors will increase the company's annual cement sales by 15-2 million tons in 2013, to 25 million tons.
The strengthening of price coordination among leading enterprises in 2013 will increase the average selling price of cement. The management of the company is optimistic about the price coordination in the core area of the company next year. Unlike the failure of price coordination in the company's core region in the second-third quarter of 2012, based on 1) leading enterprises (such as conch) basically did not release new capacity in East China and the Yangtze River basin in 2013. there is no need to reduce prices for volume and market share; 2) in the case of a recovery in cement demand in 2013, price synergy is easier to implement; management believes that price synergy will be effectively implemented, thus driving up cement prices.
Even with stricter emission standards, the company's cement manufacturing costs will remain stable recently due to serious air pollution in the capital, Beijing. Investors worry that heavily polluting industries such as cement will introduce stricter emission standards, raising the cost of cement production. Management said that the company's pollutant emission level is far lower than the current national standards. Even if the company does increase production costs in the future as a result of higher national emission standards, the increase will be limited because some of the growth will be absorbed by lower coal prices.
Valuation & target price: since September 2012, Asia cement (China) has outperformed Anhui Conch Cement and China National Building Material, two major cement companies in the Yangtze River Basin, by 25%. The company is currently trading at a price-to-earnings ratio of 6.7 times 2013 earnings, an all-time low and 58 per cent below Anhui Conch Cement. Given the upside of 13 years of profits and the current valuation level, it is rated as a buy by Asia and China, with a target price of HK $4.8. At present, the company's risk-to-income ratio is attractive, and the off-season decline in cement prices in the first quarter is a potential buying opportunity.
Catalyst for stock price performance: the start of more infrastructure projects, especially railway projects, will boost cement demand, leading to higher-than-expected prices.
Investment risk: the production time of Jiangxi Yadong new line is later than expected, and the weaker-than-expected recovery of cement demand will put pressure on cement prices.