The company announced a positive profit forecast. The net profit attributable to listed companies in 1H11 increased by more than 350% year-on-year. The net profit of 1H10 attributable to listed companies is only RMB 140 million, and the net profit forecast for 1H11 exceeds RMB 630 million. The company's 1Q11 profit was RMB 253.0 million, an increase of 274% over the previous year, meaning that the company's 2Q11 profit exceeded RMB 387 million, an increase of more than 435% over the previous year. We believe Asia Cement's 1H11 performance exceeded our expectations. We expect the company's 1H11 cement sales to reach 10.3 million tons, and the gross profit per ton is around RMB 105 yuan/ton, exceeding our previous FY11 assumption of 90.5 yuan/ton. The company's exchange earnings are expected to reach RMB 100 million. Earnings forecast for 1H11 reached RMB 646 million, up 361% year on year; earnings per share reached RMB 0.415.
Demand for cement in the Central and East China markets will gradually recover after July. Consumption in the cement market in Central China and East China is very seasonal, mainly because the rainy season affects the commencement of construction. According to our observations in 2010, cement sales in Central China and East China showed a strong rebound after entering August, while Asia's gross profit per ton reached a low of RMB 38 per ton in July 2010, and continued to rebound for 5 months to a high of close to RMB 120 per ton in December, as the strong rainy season delayed the commencement of most of the third quarter to the fourth quarter.
We expect a similar situation this year, and at the same time, we think Asia Cement's stock price will rise as fundamentals recover.
The target price was raised to HK$9.5 and the “buy” was reiterated. We raised the company's profit forecasts for fiscal year 11-13 by 45.3%, 51.0%, and 65.3% to RMB 0.940, RMB 1.109, and RMB 1.233. Based on our earnings forecast, the company's current valuation is only 5.9 times the predicted price-earnings ratio for 2011. We think the valuation is very attractive. However, we expect the increase in Asian cement tonnage margin in the fourth quarter to be limited, because conch will have three 12,000T/D lines put into operation in Anhui in the fourth quarter, which will curb the rise in cement prices in Hubei and Jiangxi regions. We assume that the gross profit per ton for FY11 is RMB 107 per ton, of which the assumption for 2H11 is 109 yuan/ton, which is slightly higher than 1H11. We raised our target price to HK$9.5, which is equivalent to 8.3 times and 7.0 times the predicted price-earnings ratio for 2011. Reiterate “buy.”