china china cement -...

Deutsche Bank Markets Research

Asia

China

Resources

Construction Materials

Industry

China Cement

Date

11 May 2016

Recommendation Change

Trip takeaways: it's for real but it's not 2009

Government supportive of investment – cyclical rebound to occur in 2H

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Johnson Wan

Research Analyst

(+852 ) 2203 6163

[email protected]

Key Changes

Company Target Price Rating

0914.HK 23.00 to 24.40(HKD)

Hold to Buy

0586.HK 17.25 to 19.03(HKD)

-

600585.SS 19.10 to 20.50(CNY)

Hold to Buy

2009.HK 7.51 to 7.12(HKD) -

601992.SS 6.25 to 5.92(CNY) Sell to Hold

Source: Deutsche Bank

Top picks

Anhui Conch Cement (0914.HK),HKD18.30 Buy

CR Cement (1313.HK),HKD2.29 Buy

BBMG (2009.HK),HKD4.97 Buy


DBe vs Cons (FY16E)

DBe Cons % diff

Conch 1.70 1.39 23%

CV 1.27 1.05 20%

BBMG 0.48 0.53 -8%


Earning revision (FY16E)

DBe (new) DBe (old) % diff

Conch 1.70 1.47 16%

CV 1.27 1.15 10%

BBMG 0.48 0.45 7%


In this report we change

recommendations, target prices and

estimates for companies under our

coverage; see Figure 1 for details.

We visited local governments, banks, construction companies, and cement producers across China in the first week of May. We saw pockets of exceptional demand strength in Northern and Southern China, but in general, cement sales in May normalized after massive restocking in March and April. Ample credit conditions in 1Q16 have paved the way for a resurrection in infrastructure and property starts, in particular property. Given that the typical construction cycle for these projects lasts one to two years, we can be more positive on 2H. We ugrade Conch to Buy with target price of HKD24.4.

Loan growth higher for 2016. Top-down view positive for cement demand Both large and small banks were supportive of lending to infrastructure and property to fulfill the government’s directive of boosting growth, but it is not 2009. In 2009, Total Social Financing (TSF) grew by 35%, but in contrast, the government is targeting no less than 13% for 2016. Given that TSF grew c.17% yoy in 1Q16, a slowdown in TSF in subsequent quarters is likely but within expectations. However, we note that: 1) previous loosening cycles all lasted at least 15 months, and the current cycle is only six months; and 2) 6MMA cement demand growth is 66% correlated to “6MMA new TSF” with a four- to five-month lag. Cement demand growth just turned positive in March, so demand growth should continue to turn positive in subsequent months.

Sustainability of demand Based on our channel checks, many infrastructure projects planned since 4Q15 and 1Q16 have now received the principal funding and construction has begun. On March 28, the Ministry of Transportation released a three-year plan for transport infrastructure. Total investment will reach RMB4.7tr, of which 131 major projects or RMB2.1tr will start in 2016. We also saw signs that property starts have been accelerated due to strong sales of late. Companies involved with concrete piles (used mainly for foundation for property construction) are currently running at full capacity, meaning that the peak time for property construction will occur in six months’ time or in 4Q.

Upgrading FY16/17 demand growth to 1.5%/0.5%. Valuations and risks We are positive on cement stocks after the recent correction, as the driver behind the price hikes ytd has been demand and not supply. Given this as well as leading producers’ willingness to boost profitability, we expect higher cement prices for the remainder of the year despite volatility. Near-term weakness in cement prices or stocks should be a good entry point. We also updated our supply-demand model for cement to reflect the positive change in demand. The longer-term implications of this short-term burst in demand are negative, as it has helped some smaller producers to recover, thus delaying the longer-term consolidation story for cement. Hence, the removal of 32.5 cement remains the key to resolve the overcapacity in cement. Our regional top picks are BBMG (North), CRC (South), and Sinoma (West), regions where we expect a sharp turnaround in profitability for 2016. Conch looks attractive after its recent sell-off prompting our upgrade. Stocks under our coverage are still trading at 1-SD below the historical trading range, therefore offering value in an expected up-cycle. We value stocks under coverage using PE, cross checked with PB/ROE. We use SOTP for BBMG and CV. Risks: changes in government policy to deter growth and focus on reforms, rise in coals prices.

11 May 2016


China Cement


Summary of changes

We are raising our earnings estimates for Conch, Conch Venture, and

BBMG as a result of stronger-than-expected cement demand recovery. We

are positive on cement stocks after the recent correction.

Figure 1: Summary of changes

Company Conch-H Conch-A Conch Venture BBMG-H BBMG-A

Ticker 0914.HK 600585.SS 586.HK 2009.HK 601992.SS

Price (May 9) 18.3 14.44 14.6 4.97 7.95

Potential upside/downside % 33% 42% 30% 43% -26%

New Rating Buy Buy Buy Buy Hold

Previous Rating Hold Hold Buy Buy Sell

New TP (HKD/CNY) 24.4 20.5 19.03 7.12 5.92

Previous target price 23.00 19.10 17.25 7.51 6.25

% chg to TP 6% 7% 10% -5% -5%

Previous target PE multiple 13x 13x n.a 14x 14x

New target PE multiple 12x 12x n.a 14x 14x

Implied EV/EBITDA multiple at TP 6.6x 6.6x n.a 6.9x 6.9x

EPS (new)

2016E 1.27

2017E 1.46

2018E 1.51

EPS (old)

2016E 1.15

2017E 1.31

2018E 1.59

% chg

2016E 10%

2017E 11%

2018E -5%

Valuation metric

SOTP: valuing the segments using PE on FY16E,

except for the waste

incineration business. For the associates, we value

Conch Cement using our TP-implied equity value.

We apply a 10% holdco discount to arrive at our

TPRisks for conch/conch venture: slower-than-expected demand recovery

Risks for BBMG: change in demand, coal prices, Bohai rim integration.

7%

-12%

-18%

0.45

0.66

0.76

0.58

0.62

Based on historical 7-yr mid-cycle average of

12.3x on FY16e

SOTP: Cement business at 6.0x EV/EBITDA

equivalent to the target sector average;

Property development using a 50% discount to

NAV. MBM segment using a discretionary 3x

EV/EBITDA.

1.70

1.99

1.88

1.47

1.68

2.05

16%

18%

-8%

0.48

Source: Deutsche Bank estimates

Figure 2: Nationwide cement prices Figure 3: Cement demand vs. new TSF

341

352

286

264

230

250

270

290

310

330

350

370

390

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

RMB/t

2013 2014 2015 2016

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Ma

r-08

Ju

l-08

No

v-0

8

Ma

r-09

Ju

l-09

No

v-0

9

Ma

r-10

Ju

l-10

No

v-1

0

Ma

r-11

Ju

l-11

No

v-1

1

Ma

r-12

Ju

l-12

No

v-1

2

Mar-

13

Ju

l-13

No

v-1

3

Ma

r-14

Ju

l-14

No

v-1

4

Ma

r-15

Ju

l-15

No

v-1

5

Ma

r-16

Monthly TSF, 6MMA yoy (RHS) Monthly cement demand, 6MMA yoy (LHS)

Cement demand lags new TSF by 4-5 months with 66% correlation

18 months 15

months

Source: Deutsche Bank, Digital Cement

Source: Deutsche Bank, NBS, Wind

11 May 2016


China Cement


Valuation charts

Figure 4: Conch forward PE Figure 5: Conch forward PB

Average,12.3x

+1SD,14.9x

-1SD,9.7x

8.9x

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Ma

y-0

9

No

v-0

9

Ma

y-1

0

No

v-1

0

Ma

y-1

1

No

v-1

1

May-1

2

No

v-1

2

Ma

y-1

3

No

v-1

3

Ma

y-1

4

No

v-1

4

Ma

y-1

5

No

v-1

5

Ma

y-1

6

Fwd PE

Forward PE Average Average +1SD

Average -1SD EPS growth

Fwd EPS growth

Average,2.0x

+1SD,2.5x

-1SD,1.5x1.1x

0%

5%

10%

15%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Ma

y-0

9

Nov-0

9

Ma

y-1

0

Nov-1

0

Ma

y-1

1

Nov-1

1

Ma

y-1

2

Nov-1

2

Ma

y-1

3

Nov-1

3

Ma

y-1

4

Nov-1

4

Ma

y-1

5

Nov-1

5

Ma

y-1

6

Fwd PB

Forward PB Average Average +1SD

Average -1SD ROE

ROE



Figure 6: CRC forward PE Figure 7: CRC forward PB

Average,14.5x

+1SD, 21.2x

-1SD, 7.9x

10.2x

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

4.0

9.0

14.0

19.0

24.0

29.0

34.0

Ma

y-1

1

Au

g-1

1

No

v-1

1

Fe

b-1

2

Ma

y-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Fwd PE

Forward PE Average Average +1SDAverage -1SD EPS growth

Fwd EPS growth

Average, 1.3x

+1SD, 1.7x

-1SD, 0.8x0.6x

0%

5%

10%

15%

20%

25%

0.4

0.9

1.4

1.9

2.4

2.9

Ma

y-1

1

Au

g-1

1

No

v-1

1

Fe

b-1

2

Ma

y-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6

Fwd PB

Forward PB Average Average +1SDAverage -1SD ROE

ROE



Figure 8: BBMG forward PE Figure 9: BBMG forward PB

Average,9.5x

+1SD,12.4x

-1SD,6.5x

8.7x

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Ma

y-1

1

Au

g-1

1

Nov-1

1

Fe

b-1

2

Ma

y-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

Nov-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

Nov-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

Nov-1

5

Fe

b-1

6

Ma

y-1

6

Fwd PE

Forward PE Average Average +1SD Average -1SD EPS growth

Fwd EPS growth

Average,0.8x

+1SD,1.1x

-1SD,0.6x

0.6x

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Ma

y-1

1

Au

g-1

1

No

v-1

1

Fe

b-1

2

Ma

y-1

2

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

No

v-1

5

Fe

b-1

6

Ma

y-1

6Fwd PB

Forward PB Average Average +1SD Average -1SD ROE

ROE



11 May 2016


China Cement


Cement trip

Where we went

Figure 10: Where we went


Companies visited

Five cement producers and concrete mixers

Two government authorities (NDRC and Cement Association)

Six financial institutions

Three construction companies

One property consultant

Day 1: Hebei (Shijiazhuang)

Day 2: Beijing

Day 3: Zhejiang (Ningbo)

Day 4: Guangdong

(Yingde & Guangzhou)

11 May 2016


China Cement


Trip photos

Figure 11: Property projects in Shijiazhuang Figure 12: Underground construction



Figure 13: Conch Ningbo grinding stations Figure 14: Beilun port next to Conch’s grinding station



Figure 15: Conch Yingde plant Figure 16: Under developed rural region in GD



11 May 2016


China Cement


A sustainable 2H rally

Leading indicators supportive of demand for 2016

1) Ample liquidity. New TSF has led cement demand growth by four to five

months with 66% correlation in the past. New TSF has turned positive for

six consecutive months, but cement demand growth has just begun to

turn positive since March. In the last two stimulus cycles, new TSF turned

positive for 18 consecutive months (December 2008 – May 2010) and 15

months (June 2012 – September 2013). With the improvement in liquidity,

infrastructure projects have received the principal to start up, and

downstream concrete mixers have received funding from developers to

purchase cement.

Figure 17: Cement demand vs. new TSF

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Ma

r-08

Ju

l-08

No

v-0

8

Ma

r-09

Ju

l-09

No

v-0

9

Ma

r-10

Ju

l-10

No

v-1

0

Ma

r-11

Ju

l-11

No

v-1

1

Ma

r-12

Ju

l-12

No

v-1

2

Mar-

13

Ju

l-13

No

v-1

3

Ma

r-14

Ju

l-14

No

v-1

4

Ma

r-15

Ju

l-15

No

v-1

5

Ma

r-16

Monthly TSF, 6MMA yoy (RHS) Monthly cement demand, 6MMA yoy (LHS)

Cement demand lags new TSF by 4-5 months with 66% correlation

18 months 15

months


Figure 18: New TSF generated by quarter

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

% yoyRMB bn

Quarterly new TSF (LHS) % yoy (RHS)

Source: Deutsche Bank, NBS

Given that 1Q16 new TSF

was surprisingly strong, a

decline in subsequent

quarters would not surprise

us

11 May 2016


China Cement


2) Concrete pile companies are operating at high utilization rates. Concrete

piles are mostly used for the foundation of houses and the superstructures

of bridges, and they are highly correlated with cement demand. Concrete

pile companies are currently operating at high utilization rates, meaning

that the peak construction timing for houses should occur in about six

months’ time, or 4Q16. Unfortunately, the information below does not

show updated data after October due to the termination of data release by

the NBS.

Figure 19: Concrete pile vs. cement demand (3MMA)

-30%

-20%

-10%

0%

10%

20%

30%

40%

Mar-

10

Jun-1

0

Sep-1

0

Dec-

10

Mar-

11

Jun-1

1

Sep-1

1

Dec-

11

Mar-

12

Jun-1

2

Sep-1

2

Dec-

12

Mar-

13

Jun-1

3

Sep-1

3

Dec-

13

Mar-

14

Jun-1

4

Sep-1

4

Dec-

14

Mar-

15

Jun-1

5

Sep-1

5

Dec-

15

Monthly concrete pile % yoy growth Monthly cement demand % yoy growth


3) Pick-up in property starts. Construction companies such as CCCC and

China State Construction are targeting new orders of c.10%-plus for 2016.

Property starts for the first three months of the year have been extremely

strong. Our channel checks indicate that smaller developers want to

accelerate the current construction rate to catch the current wave of

strong sales while larger developers need to replenish inventory after

strong sales and weak starts last year.

Figure 20: Property new starts

-40

-20

0

20

40

60

80

0

500

1,000

1,500

2,000

2,500

Fe

b-1

0

Ma

y-10

Au

g-1

0

No

v-1

0

Fe

b-1

1

Ma

y-11

Au

g-1

1

Nov-1

1

Fe

b-1

2

Ma

y-12

Au

g-1

2

No

v-1

2

Fe

b-1

3

Ma

y-13

Au

g-1

3

No

v-1

3

Fe

b-1

4

Ma

y-14

Au

g-1

4

No

v-1

4

Fe

b-1

5

Ma

y-15

Au

g-1

5

No

v-1

5

Fe

b-1

6

% yoymsqm

GFA new starts (LHS) % yoy growth

New starts pick up significantly

Source: Deutsche Bank, NBS

11 May 2016


China Cement


4) Pick-up in infrastructure starts. In 2015, there were a lot of planned

infrastructure projects in the pipeline, but they did not receive the principal

to start the projects. In 1Q16, the principal has been received, and there

was a sharp pick-up in the number of infrastructure projects started.

Planned infrastructure investment has also picked up. Recently, NDRC and

the Ministry of Transport have jointly issued a notice on the “three-year

action plan of key transportation infrastructure projects construction”. The

government has proposed 303 projects between 2016 and 2018, spanning

across railway, road, waterway, airport, and urban rail construction, with a

total investment amounting to RMB4.7tr. For details of a full project list,

please see Appendix A.

Figure 21: Investment in projects started this year in

fixed assets

Figure 22: Number of new projects

-40

-20

0

20

40

60

80

100

120

0

5

10

15

20

25

30

35

40

45

Mar-

09

Jun-0

9

Sep-0

9

Dec-0

9

Mar-

10

Jun-1

0

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

% yoyRMB trillion

Planned FAI (RMB tn) Planned FAI (% yoy)

Planned investment picked up

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

No. of new project starts (LHS) % yoy growth (RHS)

Source: Deutsche Bank, Wind

Source: Deutsche Bank, Wind

5) Inventories for cement producers are low. Low inventories are the best

indicator for future price hikes. At the national level, inventory for the first

week of May stood at 69% of the storage capacity, which was 7ppts lower

compared to the same period last year. The Northeast and East saw the

best improvement this year. For some cement producers, daily output is

similar to the levels achieved in the typical 4Q peak, which is extremely

rare. In Hebei, cement demand increased by 46% yoy for 4M16, and sales

are at a record high.

Figure 23: Cement inventory level Figure 24: Inventory level during the first week of May

68 67

68

75

69

60

62

64

66

68

70

72

74

76

78

80

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-

14

May-

14

Jul-14

Sep-1

4

Nov-1

4

Jan-1

5

Mar-

15

May-

15

Jul-

15

Sep-1

5

Nov-1

5

Jan-1

6

Mar-

16

May-

16

% storage capacity

National North Northeast East Central South Southwest Northwest

May-12 67.9 67.3 71.9 68.5 68.2 71.7 67.5 60.0

May-13 66.5 69.6 78.8 57.5 65.9 73.9 66.9 68.3

May-14 68.1 67.7 78.1 66.2 67.1 65.6 64.4 72.2

May-15 75.7 76.5 77.5 75.1 78.2 75.6 73.1 73.3

May-16 68.5 71.5 70.0 62.9 70.9 72.2 71.3 68.9



11 May 2016


China Cement


Supply-demand

China cement supply/demand model

We have revised our cement supply-demand model after the trip. On the back

of strong credit easing by the government, we expect near-term demand

growth to turn positive. We have kept our longer demand estimate intact,

forecasting a 15% decline in demand from 2014 after the peak. We now

forecast 2016/2017 demand growth to hit 1.5% and 0.5% vs. our previous

estimates of -4.3% and -3.1%. We believe utilization rates will also improve

from 62% to 63% in 2016 as a result.

Previously, we expected utilization rates in the cement sector to bottom in

2017, but we now believe this will be delayed to 2018 due to slower

consolidation. Some smaller lines have been turned back on as a result of the

higher cement pricing, prompting us to cut back on our capacity removal

assumptions. Our conversation with the China Cement Association suggests

that, while the government is actively pushing forward supply-side reform in

the steel and coal sectors, it has placed less emphasis on the cement sector.

We do, however, believe the utilization rate will improve after 2018 as a result

of the implementation of 32.5 grade removal.

Figure 25: China cement supply/demand model

(mt) 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

SUPPLY

NSP clinker capacity additions 255.7 229.4 175.7 120.6 75.4 66.8 37.9 33.9 28.7 25.0 23.0

NSP clinker capacity (design based on 310 days) 1,219 1448.6 1,624.3 1,744.9 1,820.3 1,887.1 1,925.1 1,958.9 1,987.6 2,012.6 2,035.5

Gross clinker capacity growth 26.5% 18.8% 12.1% 7.4% 4.3% 3.7% 2.0% 1.8% 1.5% 1.3% 1.1%

Obsolete clinker capacity removals (77) (64) (81) (73) (43) (27) (30) (33) (43) (47) (55)

NSP ratio 76% 82% 87% 91% 94% 95% 96% 100% 100% 100% 100%

Total clinker capacity (EOY design based on 310 days) 1,603 1,769 1,863 1,911 1,944 1,984 1,992 1,993 1,979 1,957 1,925

DBe clinker capacity (EOY based on 340 days) 1,764 1,946 2,050 2,102 2,138 2,182 2,192 2,193 2,177 2,153 2,118

Cement/Clinker ratio 1.64 1.61 1.71 1.77 1.74 1.75 1.73 1.72 1.59 1.42 1.42

Total cement capacity (EOY design based on 310 days) 2,635 2,849 3,186 3,387 3,434 3,550 3,522 3,508 3,222 2,786 2,744

DBe cement capacity (EOY based on 340 days) 2,897 3,128 3,505 3,728 3,728 3,820 3,795 3,780 3,466 3,064 3,018

Cement capacity growth 17.3% 8.0% 12.1% 6.4% 0.0% 2.5% -0.7% -0.4% -8.3% -11.6% -1.5%

DEMAND

Clinker production (mn tonnes) 1,152 1,282 1,281 1,365 1,420 1,341 1,375 1,387 1,428 1,519 1,474

YoY chg 11.5% 11.3% 0.0% 5.1% 4.1% -5.6% 2.5% 0.9% 3.0% 6.4% -3.0%

Clinker utilization rate (based on design capacity) 76% 76% 71% 72% 74% 68% 69% 70% 72% 77% 76%

DBe clinker utilization rate 69.5% 69.1% 64.1% 65.7% 67.0% 62.1% 62.9% 63.3% 65.4% 70.2% 69.1%

Net clinker import/(export) (5.4) (0.3) (2.6) (3.3) (3.6) (6.6) (13.1) (19.7) (23.6) (25.9) (25.9)

% yoy -95.1% 897.4% 28.2% 8.3% 80.5% 100.0% 50.0% 20.0% 10.0% 0.0%

Apparent clinker demand - China 1,147 1,281 1,279 1,362 1,417 1,335 1,362 1,367 1,404 1,493 1,449

YoY chg 11.8% -0.2% 6.5% 4.0% -5.8% 2.0% 0.4% 2.7% 6.3% -3.0%

Cement production (mn tonnes) 1,868 2,063 2,184 2,414 2,476 2,348 2,380 2,391 2,273 2,163 2,101

YoY chg 13.6% 10.5% 7.4% 9.6% 1.8% -4.9% 1.4% 0.4% -4.9% -4.8% -2.9%

Cement utilization rate (based on design capacity) 77% 75% 72% 73% 73% 67% 67% 68% 68% 72% 76%

DBe cement utilization rate 69.6% 68.5% 65.9% 66.8% 66.4% 62.2% 62.5% 63.1% 62.7% 66.2% 69.1%

Net cement import/(export) (9.0) (9.0) (7.9) (10.5) (9.9) (9.1) (9.5) (10.0) (10.5) (11.1) (11.6)

% yoy 0.0% 7.4% 9.6% 1.8% -4.9% 5.0% 5.0% 5.0% 5.0% 5.0%

Apparent cement demand - China 1,859 2,054 2,176 2,404 2,466 2,339 2,371 2,381 2,263 2,152 2,090

YoY chg 13.1% 10.5% 5.9% 10.5% 2.6% -5.2% 1.4% 0.4% -5.0% -4.9% -2.9% Source: Deutsche Bank estimates, Digital Cement, NBS

11 May 2016


China Cement


Figure 26: Cement utilization rate Figure 27: Clinker utilization rate Figure 28: Cement demand growth

63% 63% 63%

66%69%

70%68%

66%67% 66%

62%

59%58%

59%

66%

70%

50%

55%

60%

65%

70%

75%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cement utilization (new) Cement utilization (old)

63% 63%

65%

70%

69%70% 69%

64%

66%67%

62%

59%58%

62%

70%

70%

50%

55%

60%

65%

70%

75%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Clinker utilization (new) Clinker utilization (old)

1.4%0.4%

-5.0% -4.9%

-2.9%

13.1%

10.5%

5.9%

10.5%

2.6%

-5.2%-4.3%

-3.1%-2.8% -2.1%

-0.3%

-10%

-5%

0%

5%

10%

15%

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cement demand growth (new) Cement demand growth (old)

Source: Deutsche Bank estimates, Digital Cement, NBS



Cement pricing

Figure 29: Nationwide Figure 30: Northeast China Figure 31: East China

341

352

286

264

230

250

270

290

310

330

350

370

390


RMB/t

2013 2014 2015 2016

442

423

353

297

280

300

320

340

360

380

400

420

440

460

480


RMB/t

2013 2014 2015 2016

351

359

271

278

220

240

260

280

300

320

340

360

380

400

420


RMB/t

2013 2014 2015 2016 Source: Deutsche Bank, Digital Cement



Figure 32: Central China Figure 33: South China Figure 34: Southwest China

328317

286

258

230

250

270

290

310

330

350

370

390

410


RMB/t

2013 2014 2015 2016

292

403

299

283

220

270

320

370

420

470


RMB/t

2013 2014 2015 2016

325

375

263

250

220

240

260

280

300

320

340

360

380

400


RMB/t

2013 2014 2015 2016




Figure 35: Northwest China Figure 36: North China

335

317

295

250

240

260

280

300

320

340

360


RMB/t

2013 2014 2015 2016

341

352

286

264

230

250

270

290

310

330

350

370

390


RMB/t

2013 2014 2015 2016



11 May 2016


China Cement


Comp sheet

Figure 37: Comp sheet

Conch(H) Conch(A) CNBM CRC* BBMG (H) BBMG (A) Sinoma WCC TCC** ACC Average

Ticker 0914.HK 600585.SS 3323.HK 1313.HK 2009.HK 601992.SS 1893.HK 2233.HK 1101.TW 1102.TW

Reporting currency CNY CNY CNY HKD CNY CNY CNY CNY TWD TWD

Share price as of 10/5/2016 in local curr 18.30 14.44 3.54 2.29 4.97 7.95 1.78 1.58 30.20 26.55

Target price (in local curr) 24.40 20.50 3.84 3.36 7.12 5.92 2.68 2.21 25.68 25.47

Potential upside/downside (%) 33% 42% 8% 47% 43% -26% 51% 40% -15% -4%

Rating Buy Buy Hold Buy Buy Hold Buy Buy Hold Hold

Market cap (USD bn) 12.5 11.8 2.5 1.9 3.7 4.9 0.8 1.0 3.4 2.8

Cement capacity (mt)

2013 233.3 233.3 386.0 75.5 45.5 45.5 105.9 23.7 50.8 33.3 119.2

2014 264.0 264.0 399.0 78.3 45.7 45.7 109.7 27.0 58.4 35.0 127.1

2015 290.0 290.0 404.0 79.3 45.7 45.7 112.0 29.2 72.2 41.0 134.2

2016E 320.0 320.0 411.5 83.3 45.7 45.7 112.0 27.0 82.2 45.0 140.8

2017E 350.0 350.0 419.0 85.3 45.7 45.7 112.0 27.0 92.2 49.0 147.5

2018E 380.0 380.0 426.6 87.3 45.7 45.7 112.0 na na na

2016 capacity chg 10% 10% 2% 5% 0% 0% 0% -8% 14% 10% 4%

2015-2017E CAGR (%) 10% 10% 2% 4% 0% 0% 0% -4% 13% 9% 4%

Total sales volume (mt)

2013 228.3 228.3 283.1 74.9 38.9 38.9 84.7 18.2 44.7 25.7 99.8

2014 249.5 249.5 289.5 77.9 40.6 40.6 84.4 17.7 45.0 28.3 104.1

2015 255.6 255.6 277.9 81.4 39.3 39.3 81.0 17.1 46.6 30.2 103.6

2016E 285.2 285.2 287.5 82.2 41.2 41.2 81.0 19.0 54.3 28.3 109.8

2017E 307.6 307.6 299.5 84.8 42.8 42.8 86.0 21.0 63.6 30.7 117.0

2018E 322.0 322.0 309.2 86.9 44.5 44.5 88.8 na na na

2016 Sales volume chg 12% 12% 3% 1% 5% 5% 0% 11% 17% -6% 5%

2016-2017E CAGR (%) 10% 10% 4% 2% 4% 4% 3% 11% 17% 1% 6%

Sales exposure by regions (2015)

East 29% 29% 44% 11% 14% 10%

Central 29% 29% 13% 1% 1%

South 18% 18% 1% 76% 13% 46%

West 21% 21% 30% 13% 1% 1% 68% 100% 37%

North 11% 98% 98% 5% 3%

Export 3% 3%

ASP Assumptions

2013 237 237 253 314 233 233 264 229 290 253 259

2014 236 236 252 333 214 214 250 220 298 247 256

2015 194 194 212 266 178 178 209 200 182 196 205

2016E 198 198 213 262 179 179 214 233 221 175 212

2017E 203 203 222 270 185 185 222 275 236 171 223

2018E 201.2 201.2 223.7 275.0 190.8 190.8 227.6 na na na

ASP chg 4.1 4.1 1.1 -4.3 0.7 0.7 4.7 33.4 39.0 -21.0 7

2016 ASP chg % 2% 2% 1% -2% 0% 0% 2% 17% 21% -11% 4%

Profitability - GP (per tonne)

2013 79 79 65 89 42 42 61 40 70 58 63.1

2014 82 82 71 106 33 33 58 35 88 62 66.8

2015 54 54 49 61 18 18 39 28 28 30 38.4

2016E 64 64 56 58 32 32 45 60 32 27 46.6

2017E 67 67 61 65 35 35 51 100 34 33 55.7

2018E 62 62 62 66 38 38 55 na na na 56.4

EBITDA (per tonne)

2013 75.5 75.5 90.5 87.7 40.1 40.1 63.4 69.3 71.1

2014 77.9 77.9 100.3 104.6 62.5 62.5 67.2 55.7 78.0

2015 59.0 59.0 77.2 45.5 67.5 67.5 37.0 46.9 55.5

2016E 60.5 60.5 79.7 51.1 66.9 66.9 44.0 74.6 62.8

2017E 63.4 63.4 84.9 59.5 68.2 68.2 49.0 121.0 74.3

2018E 59 59 85 64 69 69 52 na


11 May 2016


China Cement


Figure 38: Comp sheet

5/9/2016

1.19 Conch(H) Conch(A) CNBM CRC* BBMG (H) BBMG (A) Sinoma WCC TCC** ACC Average

Ticker 0914.HK 600585.SS 3323.HK 1313.HK 2009.HK 601992.SS 1893.HK 2233.HK 1101.TW 1102.TW

Reporting currency CNY CNY CNY HKD CNY CNY CNY CNY TWD TWD

Share price as of 10/5/2016 in local curr 18.30 14.44 3.54 2.29 4.97 7.95 1.78 1.58 30.20 26.55

Target price (in local curr) 24.40 20.50 3.84 3.36 7.12 5.92 2.68 2.21 25.68 25.47

Potential upside/downside (%) 33% 42% 8% 47% 43% -26% 51% 40% -15% -4%

Rating Buy Buy Hold Buy Buy Hold Buy Buy Hold Hold

Market cap (USD bn) 12.5 11.8 2.5 1.9 3.7 4.9 0.8 1.0 3.4 2.8

Valuation - P/E

2014 10.8 8.1 5.4 8.4 8.9 12.5 8.0 84.9 15.6 13.2 19.4

2015 15.1 14.4 27.8 237.1 13.0 24.2 7.8 293.0 20.1 15.8 78.7

2016E 8.9 8.9 13.0 10.9 8.8 8.8 5.5 14.3 18.8 16.7 12.1

2017E 7.6 7.6 9.8 8.3 7.4 7.4 4.3 5.2 17.3 14.3 9.3

2018E 8.1 8.1 10.4 6.7 6.8 6.8 3.8 na na na 7.2

2016 PE @ TP 12.0 12.0 14.1 15.9 12.4 12.3 8.3 20.1 16.0 16.0 14.4

P/B

2014 1.9 1.8 0.7 1.2 0.8 1.5 0.5 0.6 1.4 0.9 1.0

2015 1.3 1.3 0.3 0.6 0.6 1.3 0.3 0.9 0.9 0.6 0.7

2016E 1.1 1.1 0.3 0.5 0.6 0.6 0.3 1.0 0.9 0.6 0.7

2017E 1.0 1.0 0.3 0.5 0.5 0.5 0.3 0.9 0.9 0.6 0.6

2018E 0.9 0.9 0.3 0.5 0.5 0.5 0.3 na na na 0.5

2016 PB @ TP 1.4 1.4 0.3 0.8 0.8 0.8 0.5 1.4 0.8 0.6 0.8

ROE (%)

2014 18% 18% 15% 16% 8% 8% 5% 1% 9% 7% 10%

2015 11% 11% 2% 4% 6% 6% 5% 0% 5% 4% 5%

2016E 12% 12% 2% 5% 7% 7% 6% 7% 5% 4% 6%

2017E 13% 13% 3% 6% 7% 7% 8% 18% 5% 4% 8%

2018E 11% 11% 3% 8% 8% 8% 8% na na na 7%

EV/tonne (RMB/t)

2014 56.3 53.5 71.6 41.4 163.0 217.5 61.1 43.4 100.9 118.4 82.0

2015 51.2 48.7 70.7 40.9 163.0 217.5 59.9 40.1 83.8 103.1 76.6

2016E 46.4 44.1 69.4 38.9 163.0 217.5 59.9 43.4 74.7 95.0 73.8

2017E 42.4 40.3 68.1 38.0 163.0 217.5 59.9 43.4 74.7 95.0 73.1

2018E 39.1 37.1 66.9 37.1 163.0 217.5 64.2 na na na 74.1

EV/EBITDA

2014 5.0 4.7 6.6 3.1 8.3 11.1 5.7 7.8 7.5 11.0 6.9

2015 6.4 6.1 8.5 6.8 8.9 11.9 6.2 9.2 11.2 17.1 9.3

2016E 5.6 5.3 8.2 6.0 7.7 10.3 5.7 5.4 10.0 16.7 8.2

2017E 5.0 4.7 7.5 5.0 7.4 9.8 5.1 3.0 9.1 15.2 7.1

2018E 5.1 4.8 7.2 4.5 7.0 9.4 4.7 na na na

2016 EV/EBITDA @ TP 7.2 7.2 8.2 7.7 9.5 9.4 6.1 7.8 9.3 13.1 8.6

Neb debt/equity (%)

2014 11% 11% 240% 56% 81% 81% 78% 66% 42% 54% 78%

2015 20% 20% 216% 63% 65% 65% 60% 26% 44% 56% 69%

2016E 18% 18% 218% 66% 31% 31% 76% 9% 62% 64% 68%

2017E 13% 13% 224% 59% 22% 22% 78% -17% 61% 63% 63%

2018E 13% 13% 214% 50% 14% 14% 76% na na na

EPS

2014 2.07 2.07 1.10 0.64 0.52 0.52 0.17 0.01 2.93 2.98

2015 1.42 1.42 0.19 0.02 0.42 0.42 0.22 0.00 1.50 1.69

2016E 1.70 1.70 0.23 0.21 0.48 0.48 0.27 0.09 1.61 1.59

2017E 1.99 1.99 0.30 0.27 0.58 0.58 0.35 0.26 1.75 1.86

2018E 1.88 1.88 0.28 0.34 0.62 0.62 0.39 na na na

EPS growth (%)

2014 17.0% 17.0% 2.7% 10.9% -30.9% -30.9% 39.3% -90.5% 8.0% -11.0% -7%

2015 -31.3% -31.3% -82.8% -97.3% -19.5% -19.5% 32.7% -43.0% -48.9% -43.4% -42%

2016E 19.5% 19.5% 20.9% 1127.8% 15.0% 15.0% 23.1% 1943.2% 7.1% -5.5% 394%

2017E 17.1% 17.1% 33.4% 30.2% 20.8% 20.8% 29.0% 177.3% 9.0% 16.7% 42%

2018E -5.5% -5.5% -6.6% 25.4% 6.9% 6.9% 11.1% na na na 6%

2015-2017E CAGR (%) 18% 18% 27% 300% 18% 18% 26% 653% 8% 5% 132%

2016E EPS sensitivity

5% chg in ASP 27% 27% 27% 58% 9% 9% 53% 42% 16% 2% 29%

5% chg in sales volume 8% 8% 8% 13% 1% 1% 1% 7% 3% 2% 5%

5% chg in coal price -6% -6% -6% -14% n/a n/a n/a -8% n/a n/a -8%

Dividend yield (%)

2014 2.9% 3.9% 2.7% 3.2% 1.1% 0.8% 1.9% 0.3% 5.4% 6.4% 3.0%

2015 2.0% 2.1% 0.5% 2.0% 0.8% 0.4% 2.3% 0.1% 4.0% 5.1% 2.1%

2016E 3.4% 3.5% 1.1% 2.8% 1.2% 0.6% 3.3% 2.4% 4.3% 4.8% 2.9%

2017E 4.0% 4.1% 1.5% 3.6% 1.4% 0.7% 4.2% 8.7% 4.6% 5.6% 4.2%

2018E 3.7% 3.9% 1.4% 4.7% na na na 2.0%


11 May 2016


China Cement


Trip notes

May 3, 2016 – Shijiazhuang 1, Hebei Zhongcheng

Property and infrastructure account for 55% and 45% of its

downstream sales.

From March, concrete sales volume has picked up by over 30%.

In Shijiazhuang, 90% of the cement supply for infrastructure projects,

including road or subway construction, is from the company.

AR collection is still so-so but has improved from last year, especially

infrastructure projects.

Demand is currently exceeding supply, and Cement prices were up by

RMB80/t after the Chinese New Year.

The company believes that prices will increase further and that strong

demand will continue from the current bidding process.

Prices hikes were mainly because of the following: 1) better pricing

cooperation between leading players; 2) demand recovery; and

3) supply-side improvement

The supply-side improvement is being achieved through:

1) demolishing small grinding stations; and 2) reducing explosive

supply to large producers.

The top five concrete producers in Shijiazhuang account for 80% of

the market share.

The recent land auction in Shijiazhuang has also doubled after Chinese

New Year.

There is more accountability between government departments now.

2, BBMG Dingxing (Hebei)

For 4M16, BBMG’s Dingxing cement and clinker sales volume reached

3.55mt, up 45% yoy. Price hikes started in March, with ex-factory

prices of clinker rising from RMB115/t to RMB220/t. The transacted

price is around RMB210/t. Cement prices were up by RMB70/t on

average, with ex-factory prices reaching RMB220/t. Meanwhile, low-

grade cement prices increased from RMB140/t to RMB190/t.

Prices are still lower compared with the same period last year, as last

year’s price started from a high level and declined. From January until

now, the company’s prices were up by 70-80%.

In April, daily output reached a record high, with production up by

130%. The company has achieved a balance in sales and production.

Currently, demand exceeds supply. Its cement inventory is empty. The

significant supply/demand improvement is due to: 1) demand

recovery, with both infrastructure and property demand picking up;

last year, Hebei GDP was one of the worst in China, and therefore

local government is under lots of pressure; and 2) supply-side

improvement, as a lot of producers were forced out from the market

due to previous low prices; 10% of obsolete capacity has been shut

down in the past few years.

The company’s selling strategy is to prioritize profit in its core regions.

In regions where demand is weaker, it will prioritize volume over

prices.

Production cost: clinker RMB100/t; cement RMB110/t.

11 May 2016


China Cement


Downstream breakdown: 40% property; 20% key infra projects; 20%

low-grade cement

AR collection has improved significantly. A lot of clients will need to

pay the company up front to purchase cement. The proportion of

clients with advanced payment increased to 70%. Only 30% of clients

collect products before paying the company.

Project pipeline: Taking Shijiazhuang metro as an example, the supply

to the project should continue through 2018-2019.

Cost structure: coal: 30%; electricity: 25-26%; limestone: 14-15%.

The company’s priority is to supply cement to infrastructure projects.

Its sales target this year is 11.1mt (including clinker). Overall, it is

confident in achieving the target. March and April daily output were

860kt and 1.1mt, respectively. It expects May’s output to reach 1mt.

Last year, our sales volume was 7mt (including 4.6mt of cement).

The company is confident that prices will continue to increase in the

next three to six months but is unsure of the magnitude.

3, Hebei NDRC

Overcapacity rationalization target for the 13th five-year plan (2016-

2020): 1) cut steel capacity by 50m tons; 2) cut coal production

capacity by 53.8m tons; 3) control total cement capacity under 200m

tons; and 4) control plate glass production capacity within 2,000 heavy

boxes.

Achievement in steel capacity rationalization: Hebei Province has

eliminated 30m tons of steel capacity during 2013-2015, which was

approximately half the target of its “6,643”. Based on full-scale

inspection conducted by the NDRC, the current total steel capacity is

approximately 260m tons after the cut.

The property market in Shijiazhuang is recovering, with sales

increasing by 25% yoy in the first quarter.

The GDP growth target for 2016 was set at 7%, a target that the

government is highly committed to achieve. For 1Q16, Hebei

registered GDP growth of 6.5% yoy, which was driven by fast growth

in investment (+10% yoy) and consumption (+10% yoy). Infrastructure

investment is particularly strong is (+36% yoy). According to the

NDRC officials, the government has started a number of major

projects related to transportation, shantytown renovation, and the

Beijing-Tianjin-Hebei economic cycle.

In terms of allocation of laid-off workers, the NDRC officials confessed

that there will be rising pressure. The officials estimate that around

119k workers will be affected by progressing supply-side reforms set

by the 13th five-year plan. However, they think the government will

tackle this through variable means, including intra-company position

transfer, re-employment skill education, and one-off compensation.

4, Bank of Hebei

Business overview: Bank of Hebei had total assets of RMB223bn

(+22% yoy), total loans of RMB100bn (+33% yoy), and total deposits

of RMB162bn (+18% yoy) in 2016, echoing our expectation of

aggressive expansion for city commercial banks. Its NPAT grew by

26% yoy to RMB2.2bn.

11 May 2016


China Cement


Asset quality: NPL ratio was 1.38% as of end-2015, with coverage

ratio of 230%. SML made up about 2% of total loans. Overdue loans

by more than 90 days/NPL was 100.8% as of 2015.

Credit allocation: The bulk of new credit is extended to projects related

to Beijing-Tianjing-Hebei, primarily transportation, industrial park, and

other industrials emigrated from Beijing. Mortgage loan balance was

merely a couple billion RMB, mainly derived from property

development lending.

Overcapacity exposure: According to management, loans to the steel

and cement industries made up only 3% and 2% of the bank’s loan

book. Adding the coal industry, total overcapacity loans were

approximately 10% of total loans.

WMP: The bank had WMP AUM of approximately RMB60-70bn and

has auctioned for entrusted management. Management did not clarify

the entrusted amount.

May 4, 2016 – Beijing 5, China Cement Association

The central government is pushing forward the supply-side reform

policy for the steel and coal sectors and has placed less focus on the

cement sector. The China Cement Association has provided its

suggestion to the government but received limited attention. For the

cement Industry, the supply-side improvement comes mainly from

producers following the market discipline to halt production. Last year,

the industry utilization rate was only 67%. The China Cement

Association is targeting to increase the industry utilization rate to 80%

within the 13th five-year plan and believes that this is achievable.

It is hard for the government to offer similar types of subsidy to

cement producers to facilitate supply-side reform as we have seen in

the coal and steel industries. However, the China Cement Association

will be setting up a special fund with money coming from producers. It

will impose a charge to producers. The amount of charge that each

producer bears depends on its electricity consumption. The China

Cement Association will calculate the amount of fund that each

province needs. This policy will also need to be supported by MIIT,

MOF, or other government authorities.

Industry consolidation is accelerating. In the past, it was common to

see leading producers acquiring small producers, but now, leading

producers are merging.

The effective production halts have played out, with producers in

Eastern China starting price hikes since March.

Leading producers support the idea of eliminating 32.5 grade cement

or at least lowering its production. Currently, 32.5 grade cement

accounts for 50-60% of the sales volume. The removal of PC32.5

grade cement may be implemented by year end. In Xinjiang, all 32.5

grade cement will be removed. With the removal of the 32.5 grade

cement, a lot of small grinding stations will be forced out from the

market, which will benefit producers with kilns. However, the

successful implementation will also depend on how the construction

and concrete standards change.

Currently, the top 10 clinker producers own 58% of the market share.

In terms of cement, the top 10 producers own only 42%. This means

11 May 2016


China Cement


that large producers can still increase cement market share by 16% if

small grinding stations are forced out form the market

The peak shifting production schemes first started in Northeast China.

There are three implications: 1) improve air quality: during the winter

heating period, air is badly polluted due to the burning of coal; 2)

change the traditional operating model: the slow season in the North

normally lasts for five months, and during this time, construction

activities are halted. Producers store clinker during winter and sell at a

cheaper price when market starts. This is economically inefficient. The

peak shifting production scheme enables producers to enter the peak

season with low inventory, so as to sell their products at better prices;

and 3) resolve oversupply issue: some producers carried out voluntary

production halts for another 10 days in Liaoning after the mandatory

peak shifting production scheme.

The production halt in the slow season of 3Q may be slightly different

from the production halt at the beginning of the year. The peak

shifting production scheme was ordered by local authorities, and if

producers do not follow, penalties may be imposed. In 3Q, many

producers also carry out production halts, but that is voluntarily.

6, ICBC

Credit growth and allocation: The bank targets total new loans of

RMB1tr in 2016, with RMB850bn extended domestically. Priority fields

include: 1) major infrastructure projects (transportation, urbanization);

2) personal mortgage and consumer loans; 3) leading companies in

the sectors; and 4) new economy-related companies (technology,

healthcare, and elderly care).

Overcapacity exposure: The bank still saw no inflection of asset quality

deterioration and is actively compressing its exposure to overcapacity

sectors. Loan balance to overcapacity sectors dropped by RMB5bn

qoq to RMB133bn (1.1% of total loan book) at end-March and is

expected to decrease by RMB13bn in the full year. However, the

calibration does not include RMB146bn worth of loans to the coal

industry (1.2% of total loans).

NPL disposal: The bank sold NPLs of RMB24.4bn to AMCs in 1Q16,

with an overall recovery ratio of 57.3%. In addition, total NPLs

disposed amounted to RMB46bn in 1Q16, which consisted of cash

recovery of RMB20bn, debt restructuring of RMB12bn, and write-off

of RMB14bn.

WMP business: The AUM of ICBC’s wealth management declined

slightly to RMB2.5trn at end-March as a result of proactive

management. About 85% of WMPs belong to non-fixed term products

(in contrast to fixed term return-indicative products), which increases

the stability of WMP funds and enhances the bank’s return. WMP

fund allocation includes deposits (6%), bonds (60%), credit assets

(22%), and equities (12%). ICBC has about RMB60bn of entrusted

WMPs as of 1Q16.

Bond investment: The bond investment balance amounted to RMB5tr

as of 1Q16, which mainly includes government bonds (32%), PBOC

bills (7%), policy bank financial bonds (31%), interbank financial bonds

(12%), and corporate bonds (12%). The bank will purchase about

RMB800-900bn of municipal bonds in 2016, which accounts for 14-

11 May 2016


China Cement


15% of total issuance. ICBC expects RMB130-140bn of LGFV loans to

be swapped through municipal bonds this year.

Dividend payout: The bank guided for a stable dividend payout going

forward, which is likely to be maintained above 30%.

7, Bank of China

Credit growth and allocation: The bank guided flat growth of loans

compared to 2015, with a domestic loan growth target of about 12%

yoy. Overseas loan growth will likely slow down due to less trade

financing, affected by lower import and export volume, and carve-out

of NCB. New credit will tilt to personal loans and MSEs, while the

bank will strictly control lending to overcapacity sectors.

NIM will likely be more stable in the next three quarters, as the

majority loan re-pricing was completed in 1Q. However, the bank still

sees a NIM compression of 15-20bps from a full-year perspective.

Overcapacity exposure: Loan balance to overcapacity sectors declined

by RMB1.4bn from end-2015 to RMB162bn (1.7% of total loan book).

The decrease was primarily in the steel sector. The definition of BOC’s

overcapacity sectors includes steel, shipbuilding, photovoltaic,

aluminum, and plate glass. Furthermore, lending to the coal industry

stood at RMB154bn as of 1Q16, with NPL ratio of 1.06%.

DES pilot program: The bank is still awaiting detailed rules formulated

by the regulator and has nothing to update on the DES trial program.

However, management pointed out that the reported debt

restructuring with Rongsheng Heavy Industry has definitely no

relationship with the DES trial.

NPL disposal: BOC transferred RMB11.5bn of NPLs to AMCs in 1Q,

which resulted in cash recovery of RMB2.5bn. In addition, the bank

wrote off RMB8bn of NPLs in 1Q16. According to management, total

NPL disposal in 2016 should be no less than the RMB104bn of 2015.

In terms of NPL-backed ABS, BOC Shandong branch has submitted a

first product plan to the regulator and is awaiting approval. The

second batch is currently under initial preparation.

NPL coverage: The regulator has not agreed on coverage relaxation,

and BOC is currently given a buffer period of three to six months. If the

discussion with the regulator fails, the bank may have to bring

coverage back to above 150% in 2Q.

WMP business: BOC’s WMP AUM declined slightly to RMB1.25tr

in1Q16, with RMB250bn on B/S and RMB1tr off B/S. The asset

allocation includes bonds (62%), interbank deposits (18%), credit

assets (18%), and equities (2%). The bank had a RMB50bn of

entrusted WMPs, which is divided by broker (RMB20bn), trust

(RMB10bn), and fund subsidiaries and others (RMB20bn). The bank

uses no leverage in on-B/S bond investment.

Municipal bond purchase: BOC will purchase more municipal bonds in

2016, which should account for 11-12% of total municipal bond

issues. In 1Q16, the bank bought RMB90bn of municipal bonds out of

RMB700bn worth of issuance. Management believes the yield is not

that bad when considering the tax-free and capital-light features.

11 May 2016


China Cement


May 5, 2016 – Ningbo 8, Ningbo Conch

Annual grinding capacity: 3.4mt; production is around 3-3.2mt, with

the company owning 35% of the market share in Ningbo.

Supply is mainly to the Ningbo market, with sales to concrete stations

and key infrastructure projects. In recent years, affected by the poor

property market, the company has increased its focus on the rural

market. Low-grade cement accounts for 50% of sales. Due to the

brand name, clients in rural market are willing to pay a RMB30/t

premium for Conch’s products

Currently, bulk 42.5 prices stand at RMB300/t and 32.5 at RMB285/t.

At the beginning of the year, prices were RMB240-245/t. In January,

prices were RMB270-280/t.

The current inventory level is 50%, which is normal. Inventory was

previously low at only 40% but increased slightly due to the public

holiday.

The company has seven silos with storage capacity amounting to

60kt. On good weather days, its daily output can reach 10kt, and on

rainy days, it is 8kt.

Conch capacity in Zhejiang is 20mt; sales volume is 30mt.

In 1Q16, its sales volume increased by 17% yoy due to the strong pick-

up in March. In April, demand was stable, and the company believes

2Q demand will decline slightly.

Overall demand is quite flat YTD, but its market share in the region is

increasing. Many small lines are halting capacity for a few years due

to the poor market and high operating cost. These idling capacities

account for 30% of total capacity in Zhejiang. Even with pick-up in

pricing and demand, the company believes that small producers are

still not likely to resume operations, as the cost is high.

The company has confidence in 2016-18 cement demand, because

many key projects will kick off in 2H16.

Downstream demand: for Ningbo plant, 60% was previously property.

This year, property will be around 50%, and 20-30% will be

infrastructure projects.

The company believes profitability will increase this year, as cost is

declining (cost of fly ash, gypsum, and electricity all decline; last year,

the ex-factory price of fly ash was RMB110/t, and now it is only

RMB55/t; gypsum was RMB95/t last year vs. RMB55/t now). Entering

the hot weather in July, the company plans to stabilize prices, and it

plans to implement price hikes in October.

Clinker from Anhui was RMB200/t previously; now it is higher.

In Sichuan, the government has rolled out policy and ordered each

producer to halt production for not less than 125 days.

In Zhejiang, producers halted production for 95 days last year and will

halt production for 115 days this year.

9, Zheshang Bank Ningbo Branch

Asset scale: As of 1Q16, the Ningbo branch had total on- and off-B/S

assets of RMB65, up by 10% from end-2015. Total loans and deposits

amounted to RMB19.5bn and RMB25bn, which accounted for 6% and

4.2%, respectively, of Zheshang Bank Group.

NSCA: The bank had RMB17bn of non-standard credit assets (NSCA)

as of 1Q16. NSCA growth of RMB5bn notably outpaced loan growth

11 May 2016


China Cement


(corporate: +RMB2bn; retail: +RMB0.5bn) in 1Q16. The majority went

to LGFV, listed companies, and property sectors. The NSCA is

primarily funded by the bank’s off-B/S WMPs for capital savings.

There are no NPLs for NSCA at the moment.

Credit growth: The bank guided for 25% yoy credit growth (including

NSCA) for 2016, a much higher speed than that of big banks. The bank

has limited exposure to overcapacity sectors.

Asset quality: NPL ratio of Ningbo branch was 4.6% as of 1Q16

(banking sector: 1.83% in February 2016). This resulted from a high

proportion of private enterprises in the local economy. The

manufacturing, wholesale and retail trade, and construction sectors

were severely hit. Mutual guarantee-related loans accounted for one-

third of NPLs. The bank’s MSE loans reached RMB6bn, with lower

NPL ratio of 2.2% as of 1Q16. Management thought Ningbo’s NPL

was more sufficiently reflected, as private enterprises are more market

driven.

WMP business: The Ningbo branch had WMP AUM of RMB7.3bn and

aims to expand it by RMB3.5-4bn in 2016.

May 6, 2016 – Guangzhou 10, Yingde Conch

4M16 clinker ASP was RMB200/t, and cement was RMB210/t.

Recently, the company has raised cement prices by RMB10/t and

clinker prices by RMB15/t.

Sales and production are balanced, with daily output reaching 27-28kt.

In April, the highest daily output can reach 32kt. Recently, affected by

the poor weather, daily output declined to 24kt. Demand has been

good this year, and the company can produce on average 750kt each

month, which sometime can reach 790kt. Previously, clinker inventory

was high at this time of the year, but inventory is now very low.

If the balance between sales and production is maintained, the

company may be able to raise prices further. When it raised prices in

April, the majority believed that this could not be passed through, but

the actual implementation has been good. It has raised prices recently;

the next price hikes may be in end-May or early June.

Clinker inventory is 250kt, or 30% of storage capacity. The clinker

inventory level is low, and the company is controlling the amount of

external sales.

Average April selling price is RMB230-240/t; yesterday, the company

announced a price hike of RMB15t/t.

It plans to halt production for 15 days for each line. Currently, it has

finished maintenance for three kilns. In May/June, it may carry out

maintenance for another kiln, depending on the inventory level.

In 4M16, overall clinker sales amounted to 1.1mt, and cement sales

amounted to 2.6mt, up 400kt yoy. Volume growth was mainly driven

by demand recovery. Normally, 1Q is a slow season, and volume

contracted from 4Q, but it was not obvious this year. 1Q16 sales

volume was similar to the 4Q15 level. Strong sales were due to: 1) a

pick-up in infrastructure projects; and 2) an increase in sales to the

rural market, as the company has grabbed more market share. The

company believes that overall cement demand in the region is not

growing as fast as the company itself and may post only 2-3% growth.

11 May 2016


China Cement


Downstream breakdown: Sales to the property sector are declining.

Demand from infrastructure projects is increasing. The company has

also increased its focus on the rural market. Cement demand from

property declined by 20% in 2015 yoy compared to 2014. Demand will

be stable this year or slightly increase.

70% of its sales are to the PRD region.

The company has carried out a technology upgrade, and each day, it

can increase production by 1.6mt.

Some nearby kilns have halted production; if they want to restart, the

cost will be around RMB100k. If they have halted production for a long

time, such as two to three years, the cost of restarting will be higher.

Current clinker cost is RMB110/t; last year, it was RMB130-140/t.

Around RMB15/t in cost saving comes from lower coal prices.

11, Guangdong Yuecai AMC

Overview: Yuecai AMC is the sole distressed asset management

platform from Guangdong province, which was under regulation of

Guangdong Finance Bureau. The company had NPL acquisition market

share of 25% in Guangdong region, following Cinda’s 40%+, in 2015.

Traditional business: The average of NPL acquisition cost was about

30 cents in 2015, which has declined in recent years due to rising NPL

supply. The average disposal period is between two and three years,

with annualized return of 10-15%. Management guided for increasing

difficulties in disposing acquired NPLs due to economic uncertainty in

one to two years.

Restructuring business: Restructuring business is essentially lending

to non-financial companies with liquidity issues. Yuecai engages much

less in this business than Cinda and Huarong, with outstanding

balance of RMB2-3bn. Customers include property companies and

listed companies. Due to uncertainty in traditional business,

management guided that it will conduct more restructuring business

in 2016, with a yield expectation of 9-13%.

DES business: The company uses DES as an approach in disposing

NPLs. The balance is limited, and DES assets have not seen profits yet.

Channel business: Channel business means the AMC helps the bank

to remove NPLs from its balance sheet, while the bank essentially

bears the risks through investment via WMP funds or repurchase

obligations. Management said the company has not provided channel

business to commercial banks and thus is not affected by Document

No. 82. Management also guided that the company will conduct some

channel business with a 2-3% fee charge in 2016.

NPL investment fund: The company raised a RMB500m NPL

investment fund in 2015, with Yuecai and some local banks as general

partners.

Funding source: The external funding source includes only bank loans,

with a PBOC benchmark interest rate.

12, CRC Guangdong Pricing Fengkai ex-factory price is around RMB270/t. Taking into account

RMB15-20/t transportation cost (by waterway), market price in PRD is

around RMB290/t. Recently, the company raised both bulk and

bagged cement prices by RMB15/t and clinker prices by RMB13/t.

11 May 2016


China Cement


In Guangdong, the current price is RMB30/t higher than the lowest

level seen in February.

Sales volume/daily output April sales are 2.92mt, vs. 2.6mt in March, up 0.3mt MoM. To reach a

balance between sales and production, the company needs to sell

82kt every day.

The overall sales volume in Guangdong declined for 2M16; that was

why producers were reluctant to raise prices in March as demand was

yet to pick up. Also, inventory levels were high at that time.

Demand The company was quite conservative when it did its annual budgeting

plan at the beginning of the year. Rainy weather continued from end-

January through the CNY holiday, and there were 13 more rainy days

compared with the same period last year. Even after the CNY, the poor

weather continued. As a result, workers returned home for the holiday

earlier and back to work later, which affects sales volume.

In terms of other competitors, Conch’s sales volume is increasing

because it rolled out a 10,000t/d line last year. Stripping out this effect,

sales volume is quite flat. Conch is grabbing market share in West GD

and PRD region. Sinoma’s volume is down, and TCCI is similar.

Last year, a lot of grinding stations were running at only 40%

utilization. A lot of grinding stations did not buy clinker after the CNY

holiday, as the inventory level in February was high. As demand

improved, there is now a shortage of supply. It does not sell clinker

externally; Conch and TCCI only sell to selective clients.

Overall sales volume in Guangdong reached 10mt in April despite the

continuous rainy weather; this level is comparable to the sales volume

during peak season. Hence, demand is actually quite strong. Inventory

is around 65%.

After the CNY holiday, the company has won bidding every week to

provide cement supply to key infrastructure projects (mainly highway

and high-speed train). From winning the bidding to selling of cement,

it will take around three months.

April downstream demand breakdown: 46% bagged cement mainly to

the rural market, up by 2-3ppts; infra project 10%; the rest is property.

In terms of the property market, demand is increasing because clients

are mostly large concrete mixers, and they have grabbed market share

from smaller players.

The company has seen orders from concrete pipe producers picking

up. Leading producers such as Jianhua have increased their sales

volume, and they are also running at full capacity. The sales of

concrete pipe can be served as a leading indicator for cement

demand, and generally, there is a five- to six-month lead/lag.

In May, it is targeting a sales volume of 3.1mt, which will be its record

high. The highest last year was November at around 3mt. Generally,

2.8mt a month can be considered a very good month.

Production halt Most of its maintenance (a total of 117 days) was in April. Production

halts for maintenance were carried out in Pingnan, Guigang, Fengkai,

Luoding, and Yangchun.

11 May 2016


China Cement


New supply Lianjiang grinding station rolled out last year, and the company ships

clinker from Guangxi to Lianjiang. The kiln will be rolled out in end-

June. Hepu line will be rolled out in August/September this year.

The Conch new line in Yangchun has been grabbing market share in

Eastern Guangdong and the PRD region.

After the price hikes, some producers such as Shijing have also

resumed operation. Junma has not, as it has faced some financing

pressure. In the core region in Guangdong, two 2,5000t/d lines have

resumed operation. In Guangdong, there are a few more (around six)

2,500t/d lines, but they have a limited impact on the company.

Tapai’s line is currently under construction, but it is unlikely to roll out

in 2017 with the current construction progress. TCCI will roll out a

6,000t/d line in Shaoguan, but these two lines will not affect the

company. The new capacity in North Guangdong will affect Shaoguan

and Hunan market. The new line in Eastern Guangdong will affect

Fujian and Jiangxi.

Outlook Cement prices may increase further in May, supported by demand and

low inventory. If the market can maintain this level, prices may

increase further in June/July and remain stable during the slow season

in 3Q.

In Guangdong, the company’s sales volume may increase by 2mt; the

additional contribution will mainly come from the Fengkai 5th line.

Misc There is no cement inflowing from the North to Guangdong now,

especially as prices in the North are also picking up.

11 May 2016


China Cement


Appendix A

Figure 39: Planned key infrastructure projects (2016)

Source: Deutsche Bank, NDRC

11 May 2016


China Cement




11 May 2016


China Cement


Model updated:09 May 2016

Running the numbers

Asia

China


Anhui Conch Cement Reuters: 0914.HK Bloomberg: 914 HK

Buy Price (10 May 16) HKD 18.30

Target Price HKD 24.40

52 Week range HKD 14.16 - 33.35

Market Cap (m) HKDm 96,977

USDm 12,496

Company Profile

Anhui Conch Cement Company Limited is China's largest cement producer with annual output of 100mn tonnes. The major products of the Company are 32.5 and 42.5 grade Portland cement and clinker. It sells its products both domestically and internationally.

Price Performance

12

16

20

24

28

32

36

May 14Aug 14Nov 14Feb 15May 15Aug 15Nov 15Feb 16

Anhui Conch CementHANG SENG INDEX (Rebased)

Margin Trends

20

24

28

32

36

13 14 15 16E 17E 18E

EBITDA Margin EBIT Margin

Growth & Profitability

0

5

10

15

20

-20

-10

0

10

20

30

13 14 15 16E 17E 18E

Sales growth (LHS) ROE (RHS)

Solvency

05101520253035

0

5

10

15

20

25

30

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Johnson Wan

+852 2203 6163 [email protected]

Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (CNY) 1.77 2.07 1.42 1.70 1.99 1.88

Reported EPS (CNY) 1.77 2.07 1.42 1.70 1.99 1.88

DPS (CNY) 0.35 0.65 0.43 0.52 0.60 0.57

BVPS (CNY) 10.5 12.4 13.2 14.4 15.8 17.1

Weighted average shares (m) 5,299 5,299 5,299 5,299 5,299 5,299

Average market cap (CNYm) 112,003 118,212 113,542 81,318 81,318 81,318

Enterprise value (CNYm) 125,633 122,414 125,613 92,676 90,511 90,893

Valuation Metrics P/E (DB) (x) 11.9 10.8 15.1 9.0 7.7 8.1

P/E (Reported) (x) 11.9 10.8 15.1 9.0 7.7 8.1

P/BV (x) 2.17 1.86 1.28 1.06 0.97 0.90

FCF Yield (%) 5.7 8.1 3.4 5.9 7.9 3.9

Dividend Yield (%) 1.7 2.9 2.0 3.4 3.9 3.7

EV/Sales (x) 2.3 2.0 2.5 1.6 1.4 1.3

EV/EBITDA (x) 7.3 6.3 8.3 5.4 4.6 4.8

EV/EBIT (x) 9.2 7.8 11.8 7.3 6.2 6.5

Income Statement (CNYm)

Sales revenue 55,262 60,759 50,976 58,292 64,458 67,432

Gross profit 17,987 20,198 13,709 18,038 20,493 20,158

EBITDA 17,240 19,433 15,093 17,249 19,515 19,072

Depreciation 3,574 3,828 4,459 4,494 4,870 5,137

Amortisation 0 0 0 0 0 0

EBIT 13,665 15,605 10,634 12,755 14,645 13,935

Net interest income(expense) -969 -619 -510 -658 -507 -557

Associates/affiliates -26 -59 -38 -42 -46 -51

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 12,671 14,927 10,086 12,055 14,092 13,327

Income tax expense 2,850 3,360 2,440 2,893 3,382 3,199

Minorities 432 586 106 127 149 141

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 9,389 10,981 7,539 9,034 10,561 9,988

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 9,389 10,981 7,539 9,034 10,561 9,988

Cash Flow (CNYm)

Cash flow from operations 13,955 16,525 8,944 15,101 17,226 13,917

Net Capex -7,518 -6,955 -5,075 -10,274 -10,774 -10,774

Free cash flow 6,437 9,570 3,869 4,826 6,452 3,143

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -1,481 -2,104 -3,918 -2,731 -3,192 -3,019

Net inc/(dec) in borrowings 3,019 1,041 2,900 -520 -840 -773

Other investing/financing cash flows -9,542 -2,489 -11,057 -1,212 -900 -314

Net cash flow -1,567 6,018 -8,206 364 1,519 -963

Change in working capital 504 2,130 -172 -981 1,444 -935

Balance Sheet (CNYm)

Cash and other liquid assets 6,519 12,512 4,285 4,649 6,168 5,205

Tangible fixed assets 56,276 62,469 64,108 69,373 74,776 79,925

Goodwill/intangible assets 6,898 7,539 8,325 8,841 9,342 9,830

Associates/investments 4,631 6,580 6,225 6,183 6,137 6,086

Other assets 18,771 13,153 22,838 26,200 27,289 29,445

Total assets 93,094 102,253 105,781 115,245 123,712 130,493

Interest bearing debt 22,141 19,916 19,185 18,665 17,825 17,052

Other liabilities 12,551 13,110 13,052 16,605 18,394 18,838

Total liabilities 34,693 33,026 32,237 35,269 36,219 35,890

Shareholders' equity 55,764 65,850 70,148 76,451 83,820 90,789

Minorities 2,638 3,377 3,397 3,524 3,673 3,814

Total shareholders' equity 58,402 69,227 73,545 79,976 87,493 94,603

Net debt 15,622 7,404 14,900 14,016 11,656 11,846

Key Company Metrics

Sales growth (%) 20.7 9.9 -16.1 14.4 10.6 4.6

DB EPS growth (%) 48.3 17.0 -31.3 19.8 16.9 -5.4

EBITDA Margin (%) 31.2 32.0 29.6 29.6 30.3 28.3

EBIT Margin (%) 24.7 25.7 20.9 21.9 22.7 20.7

Payout ratio (%) 19.8 31.4 30.2 30.2 30.2 30.2

ROE (%) 18.0 18.1 11.1 12.3 13.2 11.4

Capex/sales (%) 13.7 11.5 10.1 17.6 16.7 16.0

Capex/depreciation (x) 2.1 1.8 1.2 2.3 2.2 2.1

Net debt/equity (%) 26.7 10.7 20.3 17.5 13.3 12.5

Net interest cover (x) 14.1 25.2 20.8 19.4 28.9 25.0

Source: Company data, Deutsche Bank estimates

11 May 2016


China Cement



Running the numbers

Asia

China


Conch Venture Reuters: 0586.HK Bloomberg: 586 HK



52 Week range HKD 11.00 - 24.80


USDm 2,822

Company Profile

Conch Venture is a leading provider of energy preservation and environmental protection solutions. It is a major shareholder of Conch Holdings, the parent of Conch Cement and Conch Profile.

Price Performance

8

12

16

20

24

28


Conch Venture HANG SENG INDEX (Rebased)

Margin Trends

20

24

28

32

36

13 14 15 16E 17E 18E



0

5

10

15

20

25

0

10

20

30

40

13 14 15 16E 17E 18E


Solvency

0

2

4

6

8

10

-14-12-10-8-6-4-20

13 14 15 16E 17E 18E


Johnson Wan



Financial Summary

DB EPS (CNY) 1.22 1.24 1.08 1.27 1.46 1.51

Reported EPS (CNY) 1.22 1.24 1.08 1.27 1.46 1.51

DPS (CNY) 0.25 0.40 0.30 0.35 0.41 0.42

BVPS (CNY) 4.5 8.2 9.0 10.0 11.1 12.2





P/E (Reported) (x) 12.4 11.5 13.3 9.7 8.4 8.1

P/BV (x) 3.73 1.63 1.45 1.22 1.10 1.00

FCF Yield (%) 1.1 0.1 nm nm nm nm

Dividend Yield (%) 1.7 2.8 2.1 2.9 3.3 3.4

EV/Sales (x) 9.8 7.2 5.8 1.5 1.0 0.6

EV/EBITDA (x) 37.5 24.6 17.5 4.7 3.3 1.8

EV/EBIT (x) 42.3 27.6 19.5 5.4 4.0 2.2


Sales revenue 1,591 1,748 2,057 2,590 3,506 4,211

Gross profit 493 574 782 937 1,192 1,502

EBITDA 415 509 686 819 1,044 1,349

Depreciation 48 55 70 105 172 243


EBIT 367 454 616 714 872 1,107

Net interest income(expense) -39 45 71 71 44 50

Associates/affiliates 1,723 1,980 1,540 1,813 2,091 1,988




Income tax expense 73 107 167 178 207 261

Minorities 142 134 115 136 157 162


Net profit 1,837 2,239 1,944 2,285 2,643 2,721


DB Net profit 1,837 2,239 1,944 2,285 2,643 2,721

Cash Flow (CNYm)

Cash flow from operations 309 337 65 455 314 1,371

Net Capex -65 -318 -88 -1,236 -1,253 -1,463

Free cash flow 243 19 -23 -781 -939 -92

Equity raised/(bought back) 3,149 0 0 0 0 0

Dividends paid 0 -357 -577 -453 -636 -736

Net inc/(dec) in borrowings 767 40 1,130 550 300 300

Other investing/financing cash flows -738 -1,343 -255 615 881 845

Net cash flow 3,422 -1,641 275 -70 -395 317

Change in working capital -200 -121 -500 -316 -553 228


Cash and other liquid assets 317 2,708 2,332 2,262 1,867 2,185

Tangible fixed assets 632 1,008 998 2,051 3,054 4,197

Goodwill/intangible assets 156 249 353 432 509 586


Other assets 1,230 1,574 2,160 2,497 3,527 3,583

Total assets 9,795 17,207 18,500 21,167 24,137 26,923

Interest bearing debt 200 800 530 1,080 1,380 1,680




Minorities 425 447 491 627 784 945


Net debt -117 -1,908 -1,802 -1,182 -487 -505

Key Company Metrics

Sales growth (%) 27.3 9.8 17.7 25.9 35.4 20.1

DB EPS growth (%) 40.5 2.0 -13.1 17.5 15.6 3.0

EBITDA Margin (%) 26.1 29.1 33.3 31.6 29.8 32.0

EBIT Margin (%) 23.1 26.0 29.9 27.6 24.9 26.3

Payout ratio (%) 20.5 32.2 27.8 27.8 27.8 27.8

ROE (%) 21.3 19.5 12.5 13.3 13.8 12.9

Capex/sales (%) 4.1 18.2 7.2 47.7 35.7 34.7


Net debt/equity (%) -1.4 -12.5 -10.8 -6.3 -2.3 -2.2

Net interest cover (x) 9.5 nm nm nm nm nm


11 May 2016


China Cement



Running the numbers

Asia

China


BBMG Reuters: 2009.HK Bloomberg: 2009 HK



52 Week range HKD 3.90 - 9.47


USDm 2,743

Company Profile

BBMG has operations in manufacturing and sales of cement and modern building materials. The company also operates in property development, property investment and provision of property management services in China.

Price Performance

3

5

6

8

9

11

12


BBMG HANG SENG INDEX (Rebased)

Margin Trends

9.010.011.012.013.014.015.0

13 14 15 16E 17E 18E



02468101214

-10

0

10

20

30

40

13 14 15 16E 17E 18E


Solvency

0

2

4

6

8

10

0

20

40

60

80

100

13 14 15 16E 17E 18E


Johnson Wan



Financial Summary

DB EPS (CNY) 0.75 0.52 0.42 0.48 0.58 0.62

Reported EPS (CNY) 0.75 0.52 0.42 0.48 0.58 0.62

DPS (CNY) 0.08 0.05 0.04 0.05 0.06 0.00

BVPS (CNY) 6.1 6.7 7.1 7.5 8.0 8.5





P/E (Reported) (x) 6.3 8.9 13.0 8.6 7.2 6.7

P/BV (x) 0.87 0.77 0.60 0.55 0.52 0.49

FCF Yield (%) nm nm nm 66.8 19.2 20.3

Dividend Yield (%) 1.6 1.1 0.8 1.2 1.4 0.0

EV/Sales (x) 0.8 1.0 1.0 0.4 0.3 0.2

EV/EBITDA (x) 6.0 6.9 7.7 3.1 2.4 1.7

EV/EBIT (x) 7.7 9.1 10.6 4.2 3.1 2.2


Sales revenue 44,790 41,241 40,925 44,105 46,325 47,884

Gross profit 9,990 9,969 10,399 10,907 11,569 12,151

EBITDA 5,596 5,807 5,438 6,273 6,586 6,886

Depreciation 1,222 1,394 1,505 1,586 1,558 1,491


EBIT 4,374 4,413 3,934 4,687 5,028 5,395

Net interest income(expense) -1,017 -1,209 -1,336 -1,050 -595 -581

Associates/affiliates -34 -28 -18 -19 -20 -21




Income tax expense 751 1,094 1,232 1,447 1,765 1,917

Minorities 28 286 -66 -107 -130 -142


Net profit 3,215 2,423 2,017 2,579 3,079 3,318


DB Net profit 3,215 2,423 2,017 2,579 3,079 3,318

Cash Flow (CNYm)

Cash flow from operations -560 -6,156 -653 17,143 5,124 5,369

Net Capex -3,747 -1,548 -1,166 -2,277 -854 -854

Free cash flow -4,307 -7,704 -1,819 14,866 4,270 4,515

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -1,491 -1,932 -2,792 -210 -268 -320

Net inc/(dec) in borrowings 22,052 30,943 32,706 -26,714 -501 1,262

Other investing/financing cash flows -13,945 -20,693 -23,361 -1,050 -595 -581

Net cash flow 2,309 613 4,734 -13,107 2,905 4,875

Change in working capital -5,758 -10,929 -5,295 12,635 286 549


Cash and other liquid assets 8,596 10,980 18,370 5,263 8,168 13,043

Tangible fixed assets 18,641 18,867 19,398 19,868 19,203 18,583

Goodwill/intangible assets 5,439 5,639 5,769 6,068 6,109 6,149


Other assets 51,562 64,438 71,450 60,525 61,808 62,242

Total assets 98,840 115,685 130,747 107,687 111,453 116,406

Interest bearing debt 32,901 40,202 45,602 18,889 18,387 19,650




Minorities 3,745 5,140 4,099 3,992 3,862 3,720


Net debt 24,306 29,221 27,232 13,626 10,220 6,607

Key Company Metrics

Sales growth (%) 31.5 -7.9 -0.8 7.8 5.0 3.4

DB EPS growth (%) 8.3 -30.9 -19.5 15.7 19.4 7.8

EBITDA Margin (%) 12.5 14.1 13.3 14.2 14.2 14.4

EBIT Margin (%) 9.8 10.7 9.6 10.6 10.9 11.3

Payout ratio (%) 10.4 9.6 10.4 10.4 10.4 0.0

ROE (%) 13.1 8.4 5.8 6.6 7.4 7.5

Capex/sales (%) 8.8 4.2 4.5 5.2 1.8 1.8


Net debt/equity (%) 81.0 80.6 64.6 30.9 22.0 13.5

Net interest cover (x) 4.3 3.6 2.9 4.5 8.4 9.3


11 May 2016


China Cement


Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Anhui Conch Cement 0914.HK 18.30 (HKD) 10 May 16 7,14,15

Conch Venture 0586.HK 14.58 (HKD) 10 May 16 7,14,15

Anhui Conch Cement 600585.SS 14.44 (CNY) 10 May 16 NA

BBMG 2009.HK 4.96 (HKD) 10 May 16 NA

BBMG 601992.SS 7.95 (CNY) 10 May 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Johnson Wan

11 May 2016


China Cement


Historical recommendations and target price: Anhui Conch Cement (0914.HK) (as of 5/10/2016)

12

3 4

5

6

7

89

1011

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 27/05/2014: Buy, Target Price Change HKD36.85 7. 10/07/2015: Buy, Target Price Change HKD31.64


3. 06/11/2014: Buy, Target Price Change HKD32.83 9. 27/10/2015: Downgrade to Hold, Target Price Change HKD25.35

4. 25/02/2015: Buy, Target Price Change HKD30.13 10. 07/03/2016: Hold, Target Price Change HKD17.03


6. 22/04/2015: Buy, Target Price Change HKD39.01

Historical recommendations and target price: Conch Venture (0586.HK) (as of 5/10/2016)

12

34

5

6

7

8 9

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11

0.00

5.00

10.00

15.00

20.00

25.00

30.00


Secu

rity

Pri

ce

Date












11 May 2016


China Cement


Historical recommendations and target price: Anhui Conch Cement (600585.SS) (as of 5/10/2016)

12

3

4

5

6

7 8

9 10

0.00

5.00

10.00

15.00

20.00

25.00

30.00


Secu

rity

Pri

ce

Date






1. 04/09/2014: Upgrade to Buy, Target Price Change CNY27.14 6. 10/07/2015: Buy, Target Price Change CNY25.33

2. 06/11/2014: Buy, Target Price Change CNY25.91 7. 04/09/2015: Buy, Target Price Change CNY24.22

3. 25/02/2015: Buy, Target Price Change CNY24.10 8. 27/10/2015: Buy, Target Price Change CNY20.78

4. 01/04/2015: Buy, Target Price Change CNY25.13 9. 07/03/2016: Downgrade to Hold, Target Price Change CNY14.28

5. 22/04/2015: Buy, Target Price Change CNY31.21 10. 31/03/2016: Hold, Target Price Change CNY19.10

Historical recommendations and target price: BBMG (2009.HK) (as of 5/10/2016)

12

3

4

5

6

7

8

9

0.00

2.00

4.00

6.00

8.00

10.00

12.00


Secu

rity

Pri

ce

Date







2. 02/07/2014: Buy, Target Price Change HKD6.23 7. 04/09/2015: Upgrade to Buy, Target Price Change HKD6.76


4. 25/02/2015: Downgrade to Hold, Target Price Change HKD7.03 9. 13/04/2016: Buy, Target Price Change HKD7.51

5. 22/04/2015: Hold, Target Price Change HKD7.83

11 May 2016


China Cement


Historical recommendations and target price: BBMG (601992.SS) (as of 5/10/2016)

1

2

3

4 56 7

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00


Secu

rity

Pri

ce

Date






1. 10/09/2014: Upgrade to Hold, Target Price Change CNY6.08 5. 04/09/2015: Sell, Target Price Change CNY5.55

2. 25/02/2015: Downgrade to Sell, Target Price Change CNY5.62 6. 07/03/2016: Sell, Target Price Change CNY5.11

3. 22/04/2015: Sell, Target Price Change CNY6.26 7. 13/04/2016: Sell, Target Price Change CNY6.25

4. 10/07/2015: Sell, Target Price Change CNY5.84

Historical recommendations and target price: Conch Venture (0586.HK) (as of 5/10/2016)

12

34

5

6

7

8 9

10

11

0.00

5.00

10.00

15.00

20.00

25.00

30.00


Secu

rity

Pri

ce

Date












11 May 2016


China Cement


Historical recommendations and target price: BBMG (2009.HK) (as of 5/10/2016)

12

3

4

5

6

7

8

9

0.00

2.00

4.00

6.00

8.00

10.00

12.00


Secu

rity

Pri

ce

Date







2. 02/07/2014: Buy, Target Price Change HKD6.23 7. 04/09/2015: Upgrade to Buy, Target Price Change HKD6.76


4. 25/02/2015: Downgrade to Hold, Target Price Change HKD7.03 9. 13/04/2016: Buy, Target Price Change HKD7.51

5. 22/04/2015: Hold, Target Price Change HKD7.83

Historical recommendations and target price: BBMG (601992.SS) (as of 5/10/2016)

1

2

3

4 56 7

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00


Secu

rity

Pri

ce

Date






1. 10/09/2014: Upgrade to Hold, Target Price Change CNY6.08 5. 04/09/2015: Sell, Target Price Change CNY5.55

2. 25/02/2015: Downgrade to Sell, Target Price Change CNY5.62 6. 07/03/2016: Sell, Target Price Change CNY5.11

3. 22/04/2015: Sell, Target Price Change CNY6.26 7. 13/04/2016: Sell, Target Price Change CNY6.25

4. 10/07/2015: Sell, Target Price Change CNY5.84

11 May 2016


China Cement


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

54 %

36 %

10 %17 %16 % 18 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

11 May 2016


China Cement


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11 May 2016


China Cement


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11 May 2016


China Cement


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