Report summary
Company Overview
The company is China's leading producer of readymix concrete with strong R&D capabilities. Based on 2018 production, the company is the largest readymix concrete producer in Yunnan Province, accounting for 14.9% of the market share in Yunnan Province, and the sixth largest producer of ready mixed concrete in China.
The company currently operates 57 concrete mixing plants. In 2016-2018 and up to April 2019, the production capacity of the company's mixing plants was 12.4 million cubic meters, 19.7 million cubic meters, 21.3 million cubic meters and 7.6 million cubic meters respectively. The average utilization rates were 61.9%, 45.1%, 43.0% and 33.7% respectively.
In 2016-2018 and up to April 2019, the company's outstanding contract volumes for ready mixed concrete were RMB 2128 million, RMB 2668 million, RMB 2625 million and RMB 2,585 million respectively. Among these, the uncompleted contracts of third parties were RMB 228 million, RMB 332 million, RMB 719 million and RMB 904 million respectively.
Status and prospects of the industry
The penetration rate of readymix concrete in China is low, 46% in 2018, with an average of 80% or more in developed countries. The penetration rate of readymix concrete in Yunnan Province is only 31%, and there is plenty of room for improvement in the future.
Ready-mixed concrete production and penetration rates in western China are rising rapidly. In 2013-2018, readymix concrete production in Yunnan Province increased from 433 million cubic meters to 61.2 million cubic meters, with a CAGR of 7.2%; the output value increased from RMB 11.9 billion to RMB 20.7 billion, with a CAGR of 11.7%. It is estimated that by 2023, production will reach 82.1 million cubic meters, a CAGR of 6.2%, an output value of RMB 31.1 billion, and a CAGR of 8.5%.
Central and local governments are stepping up efforts to eliminate backward production capacity. In the future, readymix concrete production capacity growth in Yunnan Province will slow further. The 2018-2023 CAGR is 3.9%, and the capacity utilization rate will increase.
Advantages and opportunities
Relying on Yunnan Construction Investment, the majority shareholder, the company has a leading market position and a strong sales network in Yunnan.
The company has strong technical strength and can focus on more profitable infrastructure markets.
Weaknesses and risks
The company's business is concentrated and is greatly affected by regional risks.
The largest customer accounts for too much revenue.
Investment valuation
According to the prospectus pricing (HK$2.76 - HK$3.51), the company's prospecting market value was HK$1.23 billion to HK$1.57 billion, which is a small market capitalization stock. Based on 30% of the outstanding share capital, the company's circulating market value is only HK$370 million to HK$470 million. The main purposes of this IPO financing include: 35% to reduce new material production bases and mixing plants, 20% to improve existing production lines, and 35% to integrate upstream resources.
The readymix concrete industry in Yunnan Province is growing steadily, but due to rising raw material prices, the company's gross margin has continued to decline over the past three fiscal years, and net profit has continued to decline since 2017. It remains to be seen whether it will recover in the future.
Based on prospectus pricing and net profit calculation for fiscal year 2018 and the first 4 months of 2019, p/ETTM corresponding to market value after issuance was 7.2 x 9.2x. The average P/E TTM in the Hong Kong stock building materials industry is 5x-7x, and the company's valuation is too high.
Judging from the sponsor's past performance, there were mixed ups and downs on the first day, but most of them declined over the long term. The recent market situation is relatively average, but the market value in circulation of shares is low, and there may be room for stock prices to rise at the beginning of listing. However, I am cautious about long-term stock price performance based on fundamentals and valuation. An IPO-only rating of “5” is given.