Modest sector recovery expected. Asia Cement's (“AC” or “the Company”) poor3Q12 results were not surprising, with 1-3Q12 revenue at Rmb4,732mn (-19.8%YoY) and net profit slumping to Rmb147mn (-84.8%YoY) amid plunge on cementprices. From late-Aug /early-Sep, cement demand improved gradually on the backof seasonal factors and traction in under-construction projects. We also expectdemand to pick-up further on more new project-starts in 1H13E. Meanwhile,shortage of fund-flow remains a major bottleneck to construction project execution,and overcapacity continued to be an issue, so any industry recovery will bemoderate, in our view.

Bottom out in 4Q12E: a blessing or a curse Over the past 2 months, we notethat a series of price hikes, with seasonal recovery created a supportiveenvironment for sector leaders to coordinate their price moves, especially inJiangxi / other Eastern China regions where producers collaboratively raisedprices. This will likely help AC generate QoQ earnings improvement in 4Q12E, anda significant rebound of 85% YoY in 2013E net profit, given: (i) 58% of AC's 1H12cement sales volume came from Central Yangtze River Region (Jiangxi, Hubei)and 20% from Yangtze River Delta; and (ii) its earnings are highly sensitive tochanges in ASP. Meanwhile, new capacity addition in Jiujiang, Jiangxi in 2013E byAC and potentially other producers may result in an overhang on regional prices.

Its Sichuan (Chengdu) plant performance will also be dragged by: (i) slow growthin demand; (ii) new capacity in the region; and (iii) slow industry consolidationprocess in light of the cash constraints faced by sector leaders. Thus, we suspectthat AC's 2013E earnings are still not fully secure.

Healthy financial position, but lack of M&A expertise. AC has adopted aprudent investment strategy. Only 1 out of the 13 projects (including plants inoperation and under construction) was acquired through M&A's. Due to its lessaggressive expansion plans, AC is financially well positioned with enough cashand its gearing ratio is relatively lower than its peers. We forecast cash on hand of~Rmb2.7bn by end-2012E, allowing it to explore M&A targets. However, lack ofM&A experience will be a critical bottleneck when AC competes with otheraggressive players in the industry.

Initiate coverage with a HOLD rating; TP of HK$3.40. We believe that peer pricecoordination in Eastern China region will help AC register an earnings reboundfrom 4Q12E onward. Its high earnings sensitivity towards cement ASP could offeralternative trading opportunities other than industry leaders shall there beimproving market cement prices especially in Eastern / Central regions. Meanwhile,overcapacity will continue to remain a major issue in 2013E. For 2012/13/14E, weforecast EPS of Rmb0.16/0.30/0.34 for AC. Our TP of HK$3.40 is based on a2012E EV/t of Rmb350, close to the industry replacement costs, translating into aprospective 2012E/13E PER of 16.7x/9.0x. All told, we initiate coverage on AsiaCement with a HOLD recommendation.