Rating: OUTPERFORM (maintain) 

Our weekly wrap-up of the cement sector 

The CITIC Cement Index fell 1.3% last week. 1H21 cement production came to 1.15bn tons, +14.1%/+9.8% from 2020/19; cement output in June was 224m tons, -2.9%/+6.9 % from 2020/19. We expect the cement industry to improve in 2H21. Total new government special bonds quota in 1H was RMB1.0tr, with RMB2.65tr more to be issued in order to meet the annual target of RMB3.65tr. We expect more rapid issuance of special bonds in 2H. Approvals could be accelerated and the previously announced RRR cut would release about RMB1tr in long-term liquidity, which would help downstream funding. We continue to expect a rebound in cement prices during peak season. The impact of high coal prices on corporate profits should gradually slow down. With a low base in 2H20, net profit of cement companies could exceed expectations. Current valuations of cement stocks are at new lows in comparison with recent years. We believe China’s drive to achieve its carbon neutral and peak targets would shake out small supply companies with heavy energy consumption and lead the market shares of large companies to increase. This would boost regional synergy and optimize the industry structure. Hence, we see opportunities for stock re-ratings.  

Aggregates present a new blue ocean for cement companies 

With the main cement segment under growth pressure, aggregates present a new blue ocean of opportunities for cement companies. According to ccement.com, the top 10 aggregate companies combined make up less than 500m tons of capacity, accounting for less than 3% of the total, well below the industry concentration of cement. From 2017 to 2018, China shut down nearly 30,000 sand and gravel mines. With tightening mineral rights management and control, scarcity of aggregate supply has increased. Increases in mining costs have raised entry barriers for small companies. The aggregate segment offers a higher gross profit margin, so we believe this business would drive a new growth momentum for cement companies. Companies such as Huaxin Cement (600801 CH, BUY) and Anhui Conch Cement (600585 CH, BUY) have first-mover advantages in the aggregate segment. 

Our weekly takeaways on the cement industry  

Last week, the average cement price in key cities across China was RMB422/ton, RMB10/ton lower wow and RMB6.3/ton lower yoy. Regions with the worst declines (RMB10-50/ton declines) were East, Central, South, Southwest and Northwest China. In mid-July, despite the rainy season coming to an end in the southern region, rainstorms occurred in some areas. Downstream cement demand improved slightly from the previous week. Shipment rates of producers in East, South and Southwest China increased 5-10% wow. Under high pressure, companies have been trying to seize market share, driving cement price declines. Various regions are gradually approaching electricity consumption peaks. This might mean electricity rationing for the cement industry. The implementation of electricity rationing or partial hedging of demand declines could support off-season prices to an extent. We would look out for changes in short-term electricity policy. 

Recommendations  

Huaxin Cement (600801 CH, BUY): its main market in Central China was most affected by the 2020 pandemic, leading to high volumes and price elasticity in 2021. The aggregate business presents new opportunities and the company has doubled its sales target for 2021.  

Gansu Shangfeng Cement (000672 CH, BUY): geographical advantage in its East China location. 

Anhui Conch Cement (600585 CH, BUY): as a national leader with both scale and cost advantages, it would benefit the most from the carbon emission reduction policy. 

Related stock (not rated): China National Building Material Company 

Risks include: a sharp decline in cement demand; off-season prices falling more than expected; and intensifying competition in the aggregate business.  

免责声明(DISCLAIMER): 

此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。 

This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.