NEWS CENTER

Cement East China Supply Tight Buy Conch Cement China Building Materials


Release time:

Sep 16,2011

The Shanghai Securities News reported yesterday that the price of cement in Jiangsu and Zhejiang fell by RMB 20-40/ton, mainly due to:(1) weak demand;(2) higher-than-normal inventory;(3) power restrictions Some production lines resumed production after the cancellation. The report quoted an analyst as saying that cement prices in East China may remain weak in August, while demand will not be strong in the peak season. Analysis We believe that this report exaggerates the decline in cement prices, because the 20-40 yuan/ton decline only occurred in southern Jiangsu rather than the entire East China region. The average price of CNBM in East China is currently only lower than in June.

The Shanghai Securities News reported yesterday that the price of cement in Jiangsu and Zhejiang fell by RMB 20-40/ton, mainly due to:(1) weak demand;(2) higher-than-normal inventory;(3) power restrictions Some production lines resumed production after the cancellation. The report quoted an analyst as saying that cement prices in East China may remain weak in August, while demand will not be strong in the peak season. Analysis We believe that this report exaggerates the decline in cement prices, because the 20-40 yuan/ton decline only occurred in southern Jiangsu rather than the entire East China region. The realized average price of CNBM in East China is currently only RMB 10/ton lower than that in June; the storage capacity ratio is 60-70%, slightly higher than the normal level in the off-season, but we expect inventory to normalize in the next one or two weeks, because (a) major cement producers in Jiangsu and Zhejiang will stop kilns for 7 to 10 days starting next week; (B) a new round of power curtailment measures in jiangsu and zhejiang in the coming weeks will further restrain output. Potential Impact We remain optimistic about China's cement industry, not only because we are bullish on the demand outlook for the next few quarters, but more importantly because capacity continues to be constrained even in the off-season. Our recent channel research shows that China is unlikely to restart new capacity in 2012. In addition, with the end of the rainy season in East China in early September, cement demand and prices are expected to rebound strongly, which will benefit Conch Cement (600585) and China National Building Materials. Given that many construction projects may accelerate to meet the target schedule after being delayed by bad weather in the summer, we expect the fourth quarter to perform stronger than the market forecast. Conch Cement H shares (0914.HK, HK $31, on the strong buy list) and China National Building Materials (3323.HK, HK $12.18, buy) fell 12% in both trading days. We think the market reaction presents a good opportunity for investors to step in. Although Conch Cement issued a pre-increase announcement for the first half of 2011, its first-half earnings per share were still significantly higher than our and market forecasts. We expect that the 2011 interim performance of China National Building Materials will also be significantly higher than the market forecast, and the year-on-year profit growth rate will also be significantly higher than the forecast in its pre-increase announcement.