Main points of investment:
Cement leader benefited from the improvement of the supply and demand pattern of the industry, with both volume and price rising. In 2017, due to the influence of supply-side reform and other factors, national cement prices continued to rise by 72%, and the average national cement price reached an all-time high. Although it is the traditional off-season in the industry since the first quarter of 2018, cement prices remain strong in various places, with rising trends in some regions and low inventory levels. In 2018, with the deepening of supply-side structural reform and the unabated implementation of environmental protection, the continuous contraction of the supply side has become a consensus, while on the demand side, due to the low inventory of real estate, the change of government and other factors, real estate and infrastructure may exceed expectations. Cement prices are already high in 2018 and are expected to remain at a high level throughout the year. The company has a cement production capacity of 406 million tons in 2016, ranking first in the country. In recent years, with the limited release of small production capacity, the concentration of the cement industry has increased significantly. As an industry leader, the company will benefit from the simultaneous rise in volume and price. The profitability of the cement business sector is expected to continue to grow compared with 2017.
Plasterboard, fiberglass business fly together. In recent years, with the policy support and consumption upgrading, the application of plasterboard in suspended ceilings and commercial real estate has been continuously promoted and infiltrated. Beixin Building Materials, a subsidiary of the gypsum board industry leader, has obvious cost advantages and pricing power. Fully benefit from the industry boom, profitability continues to improve The subsidiary China Jushi is the largest upstream fiberglass yarn enterprise in the world, which has made outstanding achievements in recent years by expanding overseas projects and introducing efficient production management methods to continuously reduce production costs while comprehensively distributing the domestic market. In 2018, manufacturing leaders in the middle reaches will continue to benefit from supply-side reforms, squeeze the market share of small and medium-sized enterprises, and continue to increase their market share.
The merger of the two talents, the combination of the strong. On December 21, 2017, the Anti-monopoly Bureau of the Ministry of Commerce approved the merger and approval of China National Building Material and Sinopec shares. As the first and second building materials manufacturer in the country, the integration of overlapping business will improve the efficiency of resource allocation, avoid vicious competition, and improve the company's comprehensive competitiveness and the right to speak of various businesses while forming complementary advantages. I am optimistic about the integration and coordinated development of the company's business after the merger.
Profit forecast and investment rating: the company is the world's largest cement producer, commodity concrete producer and plasterboard producer, and the scale effect will be further highlighted after the merger with Sinopec shares. In the company's business-related industries are good for the leading enterprises in the environment, profit growth can be expected. We expect EPS to be HK $0.46, HK $0.56 and HK $0.62 respectively in 2017-2019, with the current share price corresponding to 14, 12 and 11 times PE, covering the "buy" rating for the first time.
Risk tips: environmental protection is not up to expectations; real estate growth has declined sharply; raw material prices have risen sharply; and the uncertainty of post-merger integration and coordinated development.