Cement industry:Strength on peak season arrival,4Q still positive

Prices surged most in the south as peak season coming.

    8M17 China cement production reached 1.54bn tonnes, down 0.5% YoY. Aug cement production declined 3.7% YoY, which we believe was due to 1) high precipitation and typhoon in Aug; and 2) impact from the 4th central environmental protection inspection. We maintain our 2017E demand forecast of 2.4bn tonnes on assumption of stabilizing slowdown of growth in infrastructure and property investment. Peak season of the industry has started since end-Aug, as inventory to storage ratio in China dropped to 62.5%. Cement prices rose 2.6% WoW/ 28.7% YoY for this week.

    4Q upbeat and FY industry earnings to exceed RMB70bn.

    Demand will recover and the cement industry will enter the traditional peak season after summer/rainy season & environmental protection inspection. Production in the South is expected to continue until CNY, while production curb will take place in the North in Nov. 4Q cement & clinker supply will be tight on off-peak production & environmental policies. With the improving demand & supply and coal prices at high levels (RMB585-600/tonne), we expect cement prices to rise further in 4Q. Sales in East China will benefit from the longer production curb in the North. We raised industry earnings forecast this year, anticipating earnings of RMB71bn, up 37% YoY. If 4Q cement prices beat 2Q, the industry's goal of RMB80-100bn could be met.

    SE China Positive, Industry Consolidation Opportunities.

    Given the stable demand and longer production time, East and South Central China could have good harvest in 4Q. At present, the inventory ratios of East and South Central China are down to 57.5%/60.3% while cement prices up 4.6%/2.5% WoW. The eastern region would be more likely to benefit from the production curtailment of the northern region during Autumn/Winter. Recommendation: we remain positive on Conch Cement on stable earnings, TP at HK$35 (12.5x 2017E P/E). We suggest paying attention to regions with good performance (South-eastern China) as well as opportunities from industry consolidation.