Events:
China is building the Sichuan-Tibet Railway, the second "heavenly road" to enter Tibet, at the world's "third pole". It will cross the southeast of the Qinghai-Tibet Plateau, which is the most geologically active on earth, making it the riskiest railway in the world. The Sichuan-Tibet Railway starts in Chengdu, Sichuan, enters Tibet through Ya'an and Kangding, and then passes through Qamdo, Nyingchi and Shannan to Lhasa, the capital of the Tibet Autonomous region. The new line is about 1700 kilometers, with a total investment of about 250 billion yuan.
Comments:
Calculation of cement demand of Sichuan-Tibet railway. The Chengdu-Ya'an section of the Sichuan-Tibet Railway will be opened to traffic in June 2018. The feasibility study of the Ya'an-Kangding section has been basically completed, and the railway project between Lhasa and Nyingchi is also stepping up construction. The section from Kangding, Sichuan to Linzhi, Tibet, which is currently under planning and design, is the longest and most difficult section of the line. Construction of this section is expected to start in 2019, with a construction period of about seven years. We believe that Tibet's political and military status determines that the state's investment in Tibet is strong and sustained. Under the background of constant border friction between China and India, the importance of the Sichuan-Tibet Railway is self-evident. at present, the Sichuan-Tibet Railway has been listed as a key project in the national 13th five-year Plan, and the construction speed of this line is expected to be guaranteed. We estimate that the length of the Sichuan-Tibet line in Tibet is expected to reach 850km. Since more than 80 per cent of the line will be built in the form of tunnels and bridges, we estimate that according to the cement demand of 15,000 tons per kilometer, this line will boost the demand for 12.75 million tons of cement in Tibet. According to the nine-year construction period, there will be about 1.42 million tons of cement demand every year.
The gap between supply and demand has further widened. In 2016, the gap between supply and demand of cement in Tibet was as high as 1.75 million tons, and the price of cement for the whole year was high, reaching a high of nearly 1000 yuan. The construction of this railway is bound to widen the gap between supply and demand. Considering that the gap between supply and demand may have been included in part of the cement demand of the Lalin line of the Sichuan-Tibet Railway in 2016, it is conservatively estimated that the future gap will reach 2.5 million tons. Compared with the cement production of 6.25 million tons in Tibet in 2016, the gap between supply and demand is still large, the supply of cement in the region will remain tight, and the time of regional prosperity is expected to be prolonged.
Investment suggestion: the prosperity of the cement market in Tibet is high, and the gap between supply and demand is difficult to fill in the short term. It is expected that the cement price will still be higher than the national level, the company's new production capacity will be released next year, and the profitability of the cement business will remain high. We expect the company's EPS from 2017 to 2019 to be 0.55,0.76 and 0.83 yuan respectively, corresponding to PE of 16x, 12x and 11x, maintaining a "buy" rating.
Risk hint: the investment in fixed assets in Tibet is not as expected, and the construction of Sichuan-Tibet railway is not as expected.
