Asia Insight: Recovery May Be Short-Lived; Downgrade to In-Line

The industry is up by 17% since early July on powerrationing and improving property construction data.

    However, we have less confidence on short-termdemand. The long-term outlook looks gloomy too.

    We downgrade Conch to EW, Sinoma to UW.

    We were wrong in our April 24 upgrade call: We hadexpected a tradable rally on the back of improvingproperty construction activities since 2Q but that did notmaterialize, due to liquidity tightening in 2Q.

    Since early July, the industry is up 17% compared tothe MSCI Index, which is up 13%. This is due to: 1) pricehike on power rationing; 2) positive July propertyconstruction data; and 3) anticipated acceleration ofinfrastructure spending.

    We have less confidence on the short-term outlookas: 1) power rationing has ended; 2) our channel checkwith concrete mixers suggest property constructionactivities did not improve as macro data shows; 3)property starts may slow in 4Q13 as sales has slowed.

    Long-term outlook also looks gloomy: Our study ofdeveloped countries’ cement markets lead us to bemore cautious on the long-term outlook for the industry,due to high cumulative consumption per cap, marginsbeing likely to fall once demand starts to peak, andconsolidation not helping to improve margins.

    Stock ideas: Our stock preference is driven by: 1)regional outlook; 2) valuation; and 3) net gearing trendinto 2H13-2014, which has been investors’ area offocus. We prefer Conch the most and Shanshui theleast. Risk: Sharp increase of infrastructure spending.