Key points of investment:
Abstract: Asia Cement (China) achieved net profit of 256 million in the first half of 2013, an increase of 110% over the previous year, higher than our forecast of 102%. The sales volume for the first half of 2013 was generally in line with our expectations, but tons of gross profit, sales management expenses, and financial expenses exceeded our expectations. We maintain our buy rating and target price of HK$5.6.
Difference from Volkswagen: Profits for the first half of 2013 exceeded expectations, with sales volume of 11.5 million tons in the first half of 2013, an increase of 18% over the previous year. The gross profit per ton in the first half of 2013 was 51 yuan/ton, 5 yuan/ton higher than the 46 yuan/ton we expected, and the year-on-year increase of 1 yuan/ton was greater than the decline in tonne cost. In the first half of 2013, tonne sales management expenses dropped by 5 yuan/ton to 26 yuan/ton, while tonne financial expenses fell by 3 yuan/ton. Meanwhile, thanks to the appreciation of RMB in the first half of 2013, the company achieved foreign exchange earnings of 51.3 million yuan due to US dollar debt, compared to the foreign exchange loss of 16.7 million yuan in the same period last year.
The net asset to debt ratio has increased slightly, and cash flow is still steady. Although the company's inventory cycle increased from 53 days in the first half of 2012 to 56 days, the receivables cycle declined from 152 days in the first half of 2012 to 143 days. Overall operating cash flow turnaround days fell from 159 days in the first half of 2012 to 144 days, benefiting from an increase in the accounts receivable cycle from 47 days in the first half of 2012 to 55 days. The net balance ratio rose slightly to 59% from 51% at the end of 2012. Operating cash flow remained at a steady level of 7.05 billion yuan, although it fell 17% year over year. As in previous years, the company did not announce an interim dividend.
The gross profit of tons in the second half of 2013 is yet to be exceeded expectations. After the recent rise in cement prices in the Yangtze River Basin, the core market of sub-cement, we estimate that the company's current tonnage gross profit level has exceeded 80 yuan/ton. Therefore, we believe that the company's gross profit per ton will reach 70 yuan/ton for the whole year, driving the 2013 full-year performance to exceed expectations. Our 2013 earnings forecast was about 24% higher than the market's agreed expectations.
Valuation & Target Price: Asia Clay is currently trading at historically low price-earnings ratio and tonne market value (5.3 times the price-earnings ratio in 2013, market value of tons 400 yuan/ton). At the same time, Asian mud has a lot of room to rise due to its good regional layout and high profit elasticity. Therefore, we reiterated our buying rating and maintained the target price of HK$5.6, corresponding to 8 times the price-earnings ratio in 2013.
Stock price performance catalyst: cement prices will rise more than expected in the next few weeks.
Investment risk: The structural transformation of China's economy may cause cement demand to be weaker than expected.