Under the good supply pattern, the resilience of real estate and the start of major infrastructure projects will support Shaanxi cement demand, and the volume and price rise is expected to continue in 2020, raising the target price to HK $2.20 and maintaining the "buy" rating. The current stock price is obviously undervalued, with a corresponding dividend yield of 7.1%, which has a good investment value.
Shaanxi cement bibcock, Xinjiang, Guizhou also have a layout. Since 2003, through self-construction and rapid expansion through mergers and acquisitions, the company has become the largest cement enterprise in Shaanxi (with a production capacity of 29%), with an annual cement production capacity of 29.2 million tons (2,330,000,000 tons in Shaanxi / Xinjiang / Guizhou). The company has outstanding advantages in southern Shaanxi (75% of production capacity) and ranks third in Guanzhong (22%). In addition, Anhui Conch Cement is the company's second largest shareholder, accounting for 44% of Guanzhong's production capacity. The company has a leading position in Shaanxi, while in Xinjiang and Guizhou, it mainly follows the market strategy.
Demand side: Shaanxi real estate still has potential, and major infrastructure projects provide strong support. 1) the continuous inflow of population supports the promotion of urbanization in Shaanxi, combined with the rapid growth of new construction (+ 20.3% from January to November compared with the same period last year), low inventory (only 1.8 months for sale / sale), strong housing prices and active transactions of second-hand housing, we believe that Shaanxi real estate demand still has potential in the next two years. 2) looking forward to 2020, infrastructure is an important starting point for stable growth, and increased counter-cyclical regulation is expected to support the overall moderate recovery of infrastructure; against this background, a number of major infrastructure projects in Shaanxi will start in 2020 to effectively support future demand. Considering the continued resilience of real estate and the steady recovery of infrastructure, we believe that the demand for cement in Shaanxi will increase steadily in 2-3 years. Combined with our more cautious judgment on Xinjiang and Guizhou, it is estimated that the company's sales in 2019-21 will be + 5.0%, 2.2% and 1.0% compared with the same period last year.
Supply side: Shaanxi competition pattern is good, conch shares optimization coordination; combined with the overall steady increase in Shaanxi demand, the company's cement price is expected to rise steadily. Mountain barriers make it difficult for external cement to enter the Shaanxi market, with concentrated production capacity (CR3 of 68 per cent) and a small number of enterprises in the province, making it easy to balance the supply pattern; in addition, Shaanxi has no plans to increase production capacity within two years. The company has a strong voice in southern Shaanxi, benefit from the continuous implementation of off-peak production in Guanzhong; superimposed Anhui Conch Cement holds a 21% stake in the company (the second largest shareholder), the company and conch have a good coordination (the two account for 47% of Shaanxi production capacity). Shaanxi cement prices have been pushed up in Q4 as scheduled; considering the steady increase in demand for major projects, a good pattern and off-peak production order, we believe that Shaanxi prices will rise steadily in 2020x21. It is estimated that the price of 2019-21 tons is 5 yuan to 337 yuan 337 yuan compared with the same period last year.
Actively layout aggregate and other new business, good cost control. Relying on its own mines to expand aggregate business, the company has put into production four aggregate production lines with a total production capacity of 7 million tons in 2018. In 3-5 years, the aggregate production capacity of the company still has great room for growth, thickening the company's performance. We estimate that aggregate sales in 2019-21 will be 200x40pm 7 million tons, contributing to an income of 1.0000,000 pounds.
The company's cost control is good. Under the circumstances of stricter environmental protection and rapid rise in raw material prices, the company's limestone cost is not rising but falling; Shaanxi coal prices are gradually down in the second half of 2019, and coal costs are expected to fall for the whole year; in the medium and long term, labor and energy consumption can still be reduced after the completion of the Tongchuan 10,000-ton line, and it is estimated that the cost in 2019-21 will be 1% to 214216 yuan from 3% to 214216 yuan compared with the same period last year.
Risk factors: Shaanxi major project promotion, aggregate business expansion is not as expected; Rain Water weather exceeded expectations.
Investment suggestion: considering the sustained resilience of Shaanxi real estate, the supporting demand for major infrastructure projects, and the good supply pattern in Shaanxi, the volume and price rise in 2020 is expected to continue. Based on the fact that the aggregate progress is slightly lower than expected, we appropriately adjust the 2019-2021 EPS forecast to 0.34max 0.39max 0.42 yuan (the original forecast 0.36max 0.42max 0.44 yuan), corresponding to PE as 3.6x/3.1x/2.9x, with reference to the comparable company valuation level to give the company 1.0 times PB in 2020, raising the target price to HK $2.20 and maintaining the "buy" rating. The current stock price is obviously undervalued, with a corresponding dividend yield of 7.1%, which has a good investment value.