China Cement:Three positive profit alerts;4Q17exceeds expectations
Earnings and target price upgrades after stronger than expected 4Q17.
After market close on Jan 5, Conch and CRC released positive profit alerts forFY17 results, while WCC also released their profit alert on Dec 29, 2017. Allthree earnings pre-releases point to an exceptionally strong 4Q, whichwarrants us to upgrade our numbers for FY17/18 and maintain our positiveview on the cement upcycle. The strength in 4Q17 results will also have aknock-on impact on 1H18 results, as pricing can be sustained at a high leveldue to extremely low inventory levels. We believe smaller cap laggard nameswill have better near-term upside here, namely Conch Venture, CRC and WCC.
Summarizing the profit alerts.
Conch preannounced FY17 NP would be 70-90% higher yoy, while weestimate Conch’s earnings would hit RMB15.97bn or EPS of RMB3.01/sh, upc.86% yoy implying GP/t reached RMB120/t in 4Q. Vols. for Conch also willsurprise in 4Q, up 8% yoy as they continue to take mkt share from peers withenvironmental issues. CRC, however, pre-announced avg selling prices for11M17 were 19.4% yoy higher, reaching HKD291.2/t, though they did notdisclose magnitude of earnings increase. We estimate FY17 earnings will reachHKD3.89bn or EPS of HKD0.6/sh, up 94% yoy. WCC announced revenue hadincreased by 28% yoy for 11M17, together with an FX gain of RMB125.9m forits USD400m bond. We estimate 2H17 GP/t average RMB72/t with earningslikely hitting RMB721m or EPS of RMB0.13/sh, up 6890% yoy.
Inventory levels at all-time lows entering 1Q18.
Nationwide inventory levels have declined for 11 consecutive wks, hittingrecord low of 50% of storage capacity for last wk of Dec, c.20% and c.34%lower than in 2016 and 2015, respt. In some regions, e.g., Eastern China, inv.
fell to 43% of storage cap.; large producers had no inv. At 50% of storage cap.,this implies only 2-3 days of inventory for the avg. producer, as bottom 25% ofstorage tanks can’t easily be extracted. Low level of inv. reflects structural shiftin industry to focus on environment and supply, with peak shifting productionhalts being very effective in curbing overcapacity. Most of winter shutdownswon’t end till mid-to-end March; 1Q18 pricing will stay elevated while 2Q18peak season should see strong restocking on empty inv.; thus, 1H18 pricingshould be much higher than expected, prompting our earnings upgrades.
Earnings revisions of 3%-18% for FY17-18 earnings; valuation and risks.
Given strength in 4Q pricing, Conch, CRC and WCC will exit Dec 17 at recordGP/t of c.RMB140/t, HKD125/t and c.RMB80/t, respectively, by our est. Duringslower 1Q18, vol. will be lower and the coal price should be flat-to-down QoQ,but ASP should only see limited correction. Thus, 1Q18 will see strongearnings growth, as Conch, CRC and WCC achieved a GP/t of RMB65/t,HKD87/t and RMB51/t respectively in 1Q17. We upgrade FY17 earnings forConch/CRC/WCC by 7%/3%/18% and FY18 earnings by 10%/5%/7%respectively. We have kept our valuation methodology unchanged at 12x and10x PE for Conch and CRC respt., while we value WCC based on RMB400/t,which also implied 10x FY18 PE. Risks: higher-than-expected coal price,breakdown of winter production halts.