At the beginning of 2022, a price war broke out in the Cement Industry in China, and supply control began to appear in mid-2024, a gap of two years.
According to Zhitong Finance APP, Macquarie has released a Research Report stating that after experiencing two years of turmoil from 2014 to 2016, the Organization of the Petroleum Exporting Countries (OPEC) is currently operating smoothly; the Chinese Cement Industry, having undergone a similar two-year adjustment period from 2022 to 2024, is expected to maintain supply control. Given the strengthening of supply control, a decrease in Coal prices, and stabilization in the Real Estate market, the bank believes there is sustainable upward potential for gross profit per ton of Cement. The bank has lowered the earnings expectations for China Resources Cement Holdings (CARCY.US) and CONCH CEMENT (00914) to reflect the decline in sales, but still maintains an 'Outperform' rating due to their high profit margins and potential revaluation value.
Macquarie's main viewpoints are as follows:
The similarities between OPEC's two years of turmoil (2014-2016) and the Chinese Cement Industry (2022-2024).
In November 2014, OPEC collapsed due to loose discipline and intensified competition from Shale Oil. In December 2016, OPEC+ was formed to unite OPEC member countries and major non-OPEC oil-producing countries, supporting oil prices.
Similarly, in early 2022, the Chinese Cement Industry experienced a price war, and supply control began to appear in mid-2024, also with a two-year interval. Since the end of 2016, OPEC+ has been operating smoothly; based on this and other market trends, the bank holds an optimistic outlook on mid-term supply control.
Supply-side control has driven up Cement prices.
After the Spring Festival, construction activities have returned to historical levels, with leading indicators such as Construction Machinery growing strongly. In East China (Jiangsu, Anhui, etc.), Cement companies raised prices by 20 yuan/ton and 30 yuan/ton in the week of March 3rd, while South China has implemented two rounds of price increases in recent weeks. The reasons for the rise in Cement prices include:
Firstly, supply control reappears in the second half of 2024 (see previous reports). After an intense price war, leading companies reached differentiated shutdown agreements (that is, different factories have different shutdown days).
Secondly, construction activities have warmed up after the low season of the Spring Festival. Recently, CONCH CEMENT's General Manager Zhu Shengli visited Cement companies in Guangxi to discuss the prospects for supply-side control. The bank expects that supply control will continue to support Cement prices. The low inventory in Southwest, Western, and Northern China will also provide support for price increases.
There has been no significant improvement in demand for Real Estate and infrastructure.
The Chinese government's supportive policies for the Real Estate market have had a positive impact in narrowing the decline in new home sales, but the actual situation has not improved, with new construction area falling by 29% year-on-year in January-February 2025. At the same time, the government's debt reduction measures may help improve local government balance sheets, providing space for growth in infrastructure investment, but the effects have not yet materialized.
CONCH CEMENT A/H shares and China Resources Cement Holdings – maintain 'outperform the market' rating.
CONCH CEMENT: The bank has lowered its profit forecasts for 2024, 2025, and 2026 by 34%, 22%, and 25%, to 9.1 billion yuan, 12.8 billion yuan, and 12.9 billion yuan respectively, to reflect lower sales assumptions (down 2.8%, 9.5%, and 13.3% compared to previous forecasts) and lower aggregate profit margins. The bank's projections are 6%, 18%, and 12% higher than market consensus.
China Resources Cement Holdings: The bank has lowered its profit forecasts for 2025 and 2026 by 25.6% and 26.0%, to 2.3 billion yuan and 2.6 billion yuan, respectively, to reflect lower sales assumptions (down 17.5% for both compared to previous forecasts) and lower aggregate profit margins. The bank's profit forecasts for 2025 and 2026 are 60% and 59% higher than Wind market consensus. The bank also introduces a net income forecast for 2027 of 2.8 billion yuan. The target stock price remains unchanged (target PE increased). Given the expected continuous improvement in gross profit per ton and stable dividend yield, maintain 'outperform the market' ratings for both (CONCH CEMENT as a key Buy rating).
