cement - china

7/31/2019 Cement - China

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China Cement SectorIndustrials Basic MaterialsMichelle Leung 25 May 2011

This document may not be distributed in or into the PRC.

Table of Contents

CHINA CEMENT SECTOR.................................................. 1

INVESTMENT SUMMARY ................................................... 2

CEMENT IS STILL CHEAP ................................................. 3

STRONG DEMAND PULL................................................. 10

MORE CAPS ON SUPPLY SIDE ....................................... 16

PROVINCIAL ANALYSIS .................................................. 23

PEER COMPARISONS..................................................... 26

COMPANY UPDATE

ANHUI CONCH (914HK) ....................................................... 29

CHINA NATIONAL BUILDING MATERIAL (3323HK)................... 45

LISTED COMPANIES IN THIS REPORT .............................. 61


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BOCI research is available electronically on Bloomberg (BOCR ), thomsonreuters.com and www.bociresearch.com.

Industrials Basic Materials | Sector Update 25 May 2011

OVERWEIGHT

CompanyStockcode TP Rating

Anhui Conch 914 HK HK$40.70 BUY

CNBM 3323 HK HK$17.30 BUY

Shanshui Cement 691 HK HK$11.90 BUY

CR Cement 1313 HK HK$7.23 BUY

West China Cement 2233 HK HK$3.25 HOLD

Where are we Different?

Our detailed estimation of cement demand fromsocial housing and analysis that it should morethan offset the commodity housing slowdown

Our above-consensus EPS estimates for C nch

Key Highlights of this Report

Estimated cement demand from socialhousing

Fig. 20

Analysis of % achievement neededfrom social housing to offsetcommodity housing slowdown

Fig. 21

Scorecard for prov ince preferences Fig. 41

Scorecard for cement companypreferences

Fig. 53

Key Catalysts/Events

Analyst marketing in Hong Kong 26-27 May

Anhui Conch's Sales Exposure by Segmentin 2010

Infrastructure

40%

Property

33%

Rural areas

27%

Source: Company data

CNBMs sales exposure by Segment in 2010

China United South Cement

Infrastructure 40% 20%

Urban development 45% 70%

Real estate 15% 10%

Source: Company data, BOCI Research estimates

China Cement Sector

Cementing Growth over theTwelfth Five-Year PeriodWe have seen share price corr ections of over 10 % across th e board sincethe rapid r un in 4Q10. Some investors wonder if the heat on th e cementstocks has been overdone and if the positives have been priced in. Wereiterate our bull ish view on t he cement sector. With only a 0.7% CAGRover t he last decade, w e t hink Chinas cement prices are stil l cheap. Withthe potential easing of oversupply by 2013, we see strong support forcement prices going forw ard. That said, w e consider eastern and southernChina our most favoured regions, given their strong fundamentals and

less grow th slowdow n in new constr uction project start s in 1Q11. I n ourHong Kong-list ed cement un iverse, we choose Anhui Conch as th e top pickand least pr efer West China Cement ( WCC).

Cement Prices Still Very Cheap

Dogged by overcapacity, the national average cement price has stagnated overthe past decade (0.7% CAGR and up only 9% during 2000-10), compared witha more than 260% increase in the coal price during the same period.

Although eastern China outperformed last year in terms of cement price hikes,substantial upside still exists given that over the past 13 years, the cement pricein the region has underperformed the national average with a 4.6% YoY decline(vs. a 4% rise in the national average).

Social Housing Impact > Commodity Housing

We believe cement demand will be boosted by 3-7% per year during 2011-13,assuming an 80% achievement rate of the governments unit constructiontarget in our base case.

According to our scenario analysis, if the social housing achievement rate isabove 70% this year, it could offset a 30% fall in GFA starts for commodityhousing.

Anhui Conch should be the largest beneficiary under social housingconstruction.

Demand Pull from Rapid Urbanisation

Rapid urbanisation in China is expected to sustain a high level of constructionactivities, especially for water conservancy and infrastructure upgrades in the12th 5-year Plan (5YP) period. China National Building Material (CNBM)

should benefit the most given its largest exposure to rural areas among all listednames.

More Caps on Supply Side

The Ministry of Industry and Information Technology (MIIT) has accelerated theplan to eliminate obsolete capacity, especially in provinces such as Hebei,Shanxi, Liaoning and Zhejiang. This bodes well for CNBM and ShanshuiCement .

Top Buy

Anhui Conch is our top pick in the sector (target price: HK$40.70). As thesecond largest cement producer in China and one of the most cost-efficient, webelieve Conch should trade at a premium to peers. Moreover, we believe it is oneof the biggest beneficiaries of social housing construction. Despite its large size,

we expect the companys net profit to register a 46% CAGR in 2010-13 andanticipate it will become one of the fastest-growing companies in the cementuniverse. Trading at only 11x 2011 P/E, we think now is a good time to BUY.

BOCI Research Limited

China: Industrials Basic MaterialsMichelle Leung(852) 3988 [email protected]


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This document may not be distributed in or into the PRC. 2

INVESTMENT SUMMARY

We have seen share price corrections of over 10% across the board since therapid run in 4Q10. Some investors wonder if the heat on the cement stocks hasbeen overdone and if the positives have been priced in. We reiterate our bullish

view and believe that the recent correction has been more a result of marketsentiment than of fundamentals. The national cement prices have continued theupswing that began in 1Q11, up 19% YoY as of 20 May. Having said that, thegrowth slowdown for new project starts has made us wary of a possibleslowdown in cement demand growth later in 2012, so we must be more selectivein terms of cement companies exposure by province. In this regard, easternChina is still the safest, in our view.

Our positive view is based on our belief that:

1) Cement is still cheap;

2) Industry consolidation should continue, thus providing greater pricing

power for companies with larger market shares;

3) Cement demand stemming from social housing should be able to offset theslowdown in the property market. Moreover, urbanisation should remainthe major growth driver for cement demand.

4) The central government will not resume approvals of new production lines,thus restricting supply growth for at least the next 2-3 years.

We think the cement sector has become attractive once again after the recentshare price correction. Our ranking of cement companies is: Anhui Conch, ChinaNational Building Material, Shanshui Cement, China Resources Cement and West

China Cement. We reiterate ourOVERWEIGHT

rating for the sector.


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CEMENT IS STILL CHEAP

We remain positive on the cement sector despite many investors posing thesame question after the recent cement price run: Is the current high pricesustainable? Our answer is YES, and w e see it as STI LL low . Dogged by

overcapacity, the national average cement price has stagnated over the pastdecade (0.7% CAGR and 9% growth during 2000-10) compared with a morethan 260% coal price increase in the same period. Cement deserves more upsidegoing forward given the continuously improving demand and supply balance.

Eastern China was the top performing region in China last year in terms ofcement price hikes (up 60% to RMB513/tonne), compared with the nationalaverage of 18% growth to RMB431/tonne. Having said that, there should still besubstantial upside given that over the past 13 years, the cement price in easternChina has underperformed the national average with a 4.6% YoY decline (vs. a4% rise in the national average).

Figure 1. Historical National Cement Price Trend

300

350

400

450

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)

+0% CAGR within 1997-2010

+39% from trough in 2007

Source: Digital Cement, BOCI Research

Figure 2. Historical Cement Price Trend in Eastern China

250

300

350

400

450

500

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Eastern China cement price: 2% CAGR in1997-2010 and up 23% from 1997 to May2011


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Figure 3. Historical Cement Price Trend in Southern China

280

320

360

400

440

480

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Figure 4. Historical Cement Price Trend in Northern China

250

300

350

400

450

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Figure 5. Historical Cement Price Trend in NE China

280

300

320

340

360

380

400

420

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Southern China cement price: 1% CAGR in1997-2010 and up 19% from 1997 to May2011

Northern China cement price: 1% CAGR in1997-2010 and up 22.6% from 1997 to May2011

NE China cement price: 0% CAGR in1997-2010 and down 1% from 1997 to May2011


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Figure 6. Historical Cement Price Trend in SW China

320

340

360

380

400

420

440

460

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Figure 7. Historical Cement Price Trend in NW China

280

300

320

340

360

380

400

420

440

460

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)


Figure 8. Historical Cement Price Trend Comparison

250

300

350

400

450

500

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YTD

(Rmb/tonne)

N China NE China E China

S China SW China NW China


SW China cement price: 1% CAGR in1997-2010 and up 10% from 1997 to May2011

NW China cement price: 1% CAGR in1997-2010 and up 21% from 1997 to May2011


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Successful Demonstration: Effective Capacity EliminationLeads to Cement Price Hikes

As a result of the stringent capacity expansion controls and massiveconsolidation in eastern China over the past few years, the growth in cementcapacity in the region was much slower that that in the north and southwest. The

percentage of total national capacity located in the east dropped from the peakin 2006 (41.1%) to around 34% in 2010. However, new project investment(which has implications for cement demand) in the east was the highest in thecountry, accounting for 27.1% of the total last year.

Figure 9. W-shaped Growth Cycle for Cement Production in China

12.93

7.71

18.14

4.66

12.22 12.16

0

2

4

6

8

10

12

14

16

18

20

81-85 86-90 91-95 96-00 01-05 06-10 11-15

% Implying a sharp decline in

production growth in 2011-15E

E


Figure 10. BOCI Forecasts of Cement Demand and Supply Balance

New dryprocess

Totalcapacity

YoYgrowth (%)

Totaloutput

YoYgrowth (%)

Totaldemand

YoYgrowth (%)

2002 17% 914 8 725 9 709 15

2003 24% 1,100 20 862 19 810 14

2004 34% 1,249 14 970 13 932 15

2005 42% 1,346 8 1,060 9 998 7

2006 48% 1,410 5 1,240 17 1,173 18

2007 54% 1,464 4 1,360 10 1,320 13

2008 62% 1,589 4 1,388 2 1,357 3

2009 70% 1,806 14 1,629 17 1,597 18

2010 77% 1,958 8 1,868 15 1,848 16

2011E 85% 2,237 14 2,126 10 2,033 10

2012E 90% 2,437 9 2,327 10 2,195 8

2013E 96% 2,287 (6) 2,287 (2) 2,327 6

Source:BOCIResearchestimates


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Figure 11. Capacity Growth in Eastern China

0

100

200

300

400

500

600

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

m tonnes

Zhejiang Shanghai Shandong Hubei Jiangsu

+11.2% CAGR within 2001-10


Figure 12. Capacity Growth in Central China

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m tonnes

Anhui Jiangxi Hunan Fujian

+15.6% CAGR wihtin 2001-10

Source: Digital cement, BOCI Research

Figure 13. Capacity Growth in Southern China

0

50

100

150

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m tonnes

Guangdong Guangxi

+10.2% CAGR wihtin 2001-10

Source: Digital cement, BOCI Research

Eastern China had the most effectivecapacity expansion controls among allregions, with capacity growing at a CAGR ofonly 6% over the past 5 years (SW China:

21%)


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Figure 14. Capacity Growth in Western China

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m tonnes

Gansu Chongqing Sichuan Ningxia Xinjiang

+16.3% CAGR wihtin 2001-10


Figure 15. Capacity Growth in Northern China

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m tonnes

Liaoning Jilin Heilongjiang

+12.9% CAGR within 2001-10


Figure 16. Eastern China Capacity Growth Contracted in 2003-10

0% 5% 10% 15% 20% 25% 30% 35% 40%

Northern China

NE China

Eastern ChinaSouthern China

SW China

NW China

Central China

FY10 FY09 FY03

Output growth expanding

continuously in SW China

Output growth contracting

continuously in E China


Cement capacity in SW China expanded at a22% CAGR in 2005-10 and at a 16.3% CAGRduring in 2001-10, making it thefastest-growing region in the country


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Figure 17. Average Cement Production per Enterprise

0

50

100

150

200

250

NChina

Beijing

Tianjin

Hebei

Shanxi

Inner

NEChina

LiaoningJilin

Heilongjian

EChina

Shanghai

Jiangsu

Zhejiang

Anhui

Fujian

Jiangxi

Shandong

SChina

Henan

Hubei

Hunan

Guangdong

Guangxi

Hainan

SWC

hina

Chongqing

Sichuan

Guizhou

Yunan

NWC

hina

Shaanxi

Gansu

Qinghai

Ningxia

Xinjiang

Bars in red are provinces with production per enterprise lower than the national average,thus implying high industry fragmentation


High average cementproduction per enterpriseindicates high market shareconcentration in the region.Cement producers in suchregions should enjoy relativelystrong power to negotiate prices


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STRONG DEMAND PULL

1. Social Housing

Given the governments extensive investment in social housing (10m units to be

constructed in 2011-12 and 36m units during the entire 12th

5-year Plan period)as well as its goal to increase the penetration rate of social housing to 20%, webelieve cement demand will be boosted by 3-7% per year during 2011-13,assuming an 80% achievement rate in our base case. We also consider a bearishscenario with an achievement rate of only 50%, which would spur cementdemand by only 2-4% per year during the period. With reference to last year andthe central governments mounting determination to increase social housingsupply in China, we believe an 80% achievement rate is highly possible. Thisyear, the government has budgeted around RMB1.3trn for related projects,representing 5% of Chinas total fixed asset investment (FAI) in 2010. Thegovernments Document of Objective Responsibilitystipulates that constructionof all targeted affordable housing units must commence before 31 October 2011,which will provide a marked boost to cement demand in the following months.

Figure 18. Total Investment Plan for Social Housing (2009-11E)

2009 2010 2011E 12th 5YP

Investment amount (RMB bn) 384 816 1,300 5,000

YoY growth 20% 113% 59% N/A

Construction starts (m units) 3 5.8 10 36

Source: MOHURD, BOCI Research

Figure 19. Social Housing Market Volume Trend

132

396

786

1,320 1,320

0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011E 2012E

RMB bn

Note: Assuming 60sqm per unit and a GFA construction cost of RMB2,200/sqmSource: State Council, MOHURD, BOCI Research


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Figure 20. Potential Cement Demand Derived from Social Housing

No. of units (m)GFA (sqm)

per unitCement consumption

per GFA (kg/sqm) Total cement consumption

(m tonnes) (a) (b) (c) =(a)*(b)*( c)/1000

2010E 2011E 2012E 2013E 2010E 2011E 2012E 2013E

Public housing 3 6 6 3 60 220 40 79 79 42Shantytown housing 2.8 4 4 2 80 220 49 70 70 38

Total 5.8 10 10 5.3 89 150 150 80

YoY growth 68% 0% -47%

% of total cement consumption 4.8% 7.4% 6.8% 3.4%

% of additional cement demand from the previous year 5.6% 8.1% 7.4% 3.6%

Assuming an 80% achievement rate 71 120 120 64


Assuming a 50% achievement rate 44 75 75 40


Source: NDRC, BOCI Research estimates

Can Social Housing Projects Offset the Slowdown inCommodity Housing? Very Likely

As shown below, we believe that if the social housing achievement rate is above70% this year and 50% next year, it could offset a 30% fall in GFA starts forcommodity housing each year. Having said that, the property sector refuses toslow despite the central governments austerity measures. During 1Q11,commodity housing GFA starts grew 23% YoY, while property sales in terms ofGFA rose 6.4% YoY in 4M11.

Figure 21.Scenario Analysis of Cement Demand Impact from Social Housing and Commodity Housing

Commodityhousing (m sqm)

GFA/ unit

(sqm)unit

(m units)

Cement demand fromcommodity housing (m

tonnes)

Total cementconsumption in

China (m tonnes)

Commodity property floor space newly started in 2010 1,637 100 16 360 1,977

% of total cement consumption in 2010 18%

Assuming slowdown i n 2011 by:Cement demand

change (m tonnes)

10% 1,473 100 14.7 324.13 (36.01)

30% 1,146 100 11.5 252.10 (108.04)

Assuming, after 30% drop in 2011, further slowdown in 2012 by:

10% 1,031 100 10.3 226.89 (25.21)

30% 802 100 8.0 176.47 (75.63)

Cement demand from social housing in 2011-13E

Achievement rate 30% 50% 70% 80% 100%

2011E 45 75 105 120 150

2012E 45 75 105 120 150

2013E 24 40 56 64 80

*Hit hard by the financial crisis, the commodity housing newly started GFA was 920m sqm during 2H09- 1H10. Thus, we think the chance for newly started GFA to drop to 802m sqm by 2012 is mild.

Source: CREIS, BOCI Research


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Figure 22. Newly Started GFA for Commodity Housing (2006-1Q11)

-

200400

600

8001,000

1,200

1,4001,600

1,800

2M06

5M06

8M06

11M06

3M07

6M07

9M07

12M07

4M08

7M08

10M08

2M09

5M09

8M09

11M09

3M10

6M10

9M10

12M10

-40%

-20%

0%

20%

40%

60%

80%

m sqm YoY growth

Source:CREIS,BOCIResearch

Who will Benefit the Most from Social Housing?

In terms of regions, we see more aggressive targets in the north, NE, NW andSW. In terms of provinces, Heilongjiang (north), Chongqing (SW), Shaanxi (NW),Inner Mongolia (north) and Hunan (central) are ranked the top 5 in terms ofsocial housing construction targets.

As shown in the figure below, we calculate each provinces incremental cementdemand growth in 2011 driven by social housing. We multiply the incrementalsocial housing unit target in 2011 by 70sqm and 220kg cement/sqm, anassumption consistent with that in Figure 21. Also, we identify the largestbeneficiary of social housing construction by comparing each companys totalcement demand (Column A) within its major markets. Moreover, by considering

each companys exposure to real estate, we have found thatAnhui Conch,

withits 33% exposure, should be the biggest beneficiaries under the massive socialhousing construction plan. Going forward, Shanshui Cement s expansion planin Xinjiang should raise its exposure to the social housing market in the future.While West China Cement has no exposure to the real estate market, it shouldenjoy little from social housing.

Anhui Conch should be the biggestbeneficiary under the social housing theme.


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Figure 23. Social Housing Targets by Province and Companies with Exposure

2010(m units)

2011target

(m units)

YoYgrowth

(%)% oftotal

(A)Potential

cementdemand from

social housingin 2011

(m tonnes)

(B)Potential

incrementalcement demand

in 2011 driven

by socialhousing

(m tonnes)

Incrementalcement demand

growth in 2011

driven by socialhousing (%)

(= B/C)

( C ) Actualcement

demand in2010

(m tonnes)

Anhui Conch

Guangxi 0.073 0.29 297 3 4.47 3.34 4 74.6

Hunan 0.27 0.45 66 4 6.88 2.74 3 87.0

Guangdong 0.13 0.31 148 3 4.77 2.85 2 115.4

Zhejiang 0.27 0.38 43 4 5.85 1.76 2 112.8

Jiangsu 0.21 0.32 50 3 4.93 1.63 1 156.5

Anhui 0.35 0.40 14 4 6.16 0.75 1 78.7

Sichuan 0.34 0.36 4 4 5.51 0.23 0 132.3

Jiangxi 0.24 0.23 (5) 2 3.54 (0.20) 0 62.2

Heilongjiang 0.71 0.69 (2) 7 10.66 (0.20) (1) 35.1Chongqing 0.52 0.5 (4) 5 7.70 (0.31) (1) 46.0

Gansu 0.17 0.15 (12) 2 2.31 (0.31) (1) 24.1

Sum of major markets 18.94 6.75

CNBM

Shanghai 0.18 0.22 25 2 3.39 0.68 10 6.7

Jilin 0.259 0.443 71 4 6.82 2.83 7 39.7

Henan 0.14 0.421 201 4 6.48 4.33 4 114.8

Hunan 0.269 0.447 66 4 6.88 2.74 3 87.0

Hebei 0.16 0.38 133 4 5.85 3.34 3 125.9

Zhejiang 0.266 0.38 43 4 5.85 1.76 2 112.8

Jiangsu 0.21 0.32 50 3 4.93 1.63 1 156.5Shandong 0.16 0.19 20 2 2.93 0.49 0 147.5

Jiangxi 0.243 0.23 (5) 2 3.54 (0.20) 0 62.2

Heilongjiang 0.71 0.69 (2) 7 10.66 (0.20) (1) 35.1

Sum of major markets 17.25 3.68 3

Shanshui Cement

Xinjiang 0.16 0.26 68 3 4.00 1.62 7 23.7

Liaoning 0.21 0.34 64 3 5.24 2.05 4 47.8

Inner Mongolia 0.39 0.45 15 5 6.93 0.88 2 53.7

Shanxi 0.25 0.28 11 3 4.34 0.43 1 33.0

Shandong 0.16 0.19 20 2 2.93 0.49 0 147.5


CR Cement

Fujian 0.08 0.27 255 3 4.16 2.99 5 57.9

Guangxi 0.07 0.29 297 3 4.47 3.34 4 74.6

Guangdong 0.13 0.31 148 3 4.77 2.85 2 115.4

Hainan 0.13 0.14 7 1 2.08 0.14 1 12.6


WCC

Shaanxi 0.19 0.47 152 5 7.30 4.40 8 54.6

*Shaded provinces are the major markets for each cement companies. We believe Anhui Conch should benefit the most under the social housing theme

Source: MOHURD, BOCI Research


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Figure 24. Quarterly Total Newly Started GFA and YoY Growth(3Q04-4Q10)

0

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

-20%

0%

20%

40%

60%

80%

Cumulative GFA newly started (LHS) YoY growth (RHS)

(m sqm)

Source: WIND database, BOCI Research

2. Rapid Urbanisation

Urbanisation has been very important in stimulating overall cement demand. Weestimate that urbanisation has driven up annual GDP by 0.7% on average overthe past 10 years. During the 12th 5YP period, accelerated urbanisation shouldcontinue to drive cement demand via water conservancy projects andinfrastructure upgrades. We have cross-checked the construction activities withthe demand for building machinery, and found that the sales volume of wheelloaders was up by 45% and that of excavators by 58% YoY during 1Q11. Amongrelated companies, we believe CNBM should benefit the most from urbanisationas it has large exposure in rural areas.

Figure 25. Huge Potential for Chinas Urbanisation

82% 82% 80% 77% 74%67%

43%

90%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UK US South

Korea

Canada France Germany Japan China



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Figure 26. Chinas Latest Regional Development Plans

Time ofproposal Names Region

Jan-08 Development Plan for Guangxi Beibuwan Economic Zone Guangxi

Mar-08 Overall Plan of Coordinated Reform in Tianjin Binhai New Area Tianjin

Dec-08 Outline of the Plan for the Reform and Development of the PearlRiver Guangdong

Jan-09 State Council Opinions on Promoting Urban and Rural Reformand Development in Chongqing

Chongqing

Mar-09 Building Shanghai as International Shipping Center and FinancialCenter

Shanghai

May-09 State Council Opinions on Supporting Fujian Province in Buildingthe West Coast Economic Zone on the Taiwan Strait

Fujian

Jun-09 Development Plan of Coastal Area in Jiangsu Jiangsu

Jul-09 Liaoning Coastal Economic Zone Development Plan Liaoning

Aug-09 Outline and Development Plans of Tumen River Region Jilin

Sept-09 Outline of Plan to Boost Development of Central China Central region

Dec-09 Efficient Ecological Economic Zone Development Plan for Yellow

River Delta

Shandong

Dec-09 Poyang Lake Ecological Economic Zone Plan Jiangxi

Dec-09 Circular Economy of Gansu Province Master Plan Gansu,Shanxi

Dec-09 Council for the Promotion of International Tourism on HainanIsland

Hainan

Jan-10 Demonstration Zone Plan for the City-cluster along the YangtzeRiver in Anhui

Anhui

Jan-10 Chongqing Two Rivers New Area Chongqing

Source: Xinhua News Agency, BOCI Research


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MORE CAPS ON SUPPLY SIDE

Accelerating Outdated Capacity Elimination andEnergy-saving Target

Energy saving has always been on top of the Chinese governments agenda.MIIT has recently revised up its obsolete cement capacity elimination target from100m tonnes to 133.6m tonnes, 46% higher than in 2010. Provinces like Hebei,Shanxi, Liaoning and Zhejiang will be the key provinces.

Also, outdated capacity elimination will continue. Shandong, Guangdong, Hunanand Shanxi should be the provinces with more rapid capacity elimination.Guangdongs government is planning to remove all outdated capacity byend-2012. The Shanxi government also announced a plan to eliminate 13.2mtonnes of outdated capacity in 2011, representing 20% of the total existingcapacity. Considering the cement companies capacity allocation, we believeCNBM and Shanshui Cement should be the biggest beneficiaries.

We believe the MIITs capacity elimination targets are achievable taking

reference of the track record. During 2010, Sichuan, Guangdong, Hunan, Shanxiand Shandong were the top 5 provinces with most capacity elimination,accounting for 20-28% of their respective cement capacity in 2010. According tothe governments schedule, we believe all outdated capacity should beeliminated by end-2013. As such, the oversupply in China could possibly turn intoa shortage.

Large Cement Companies to Benefit Most from PowerRationing

We think power rationing is positive to large-sized cement companies as: (i) theyenjoy higher pricing power on lower supply, and (ii) power rationing would have

minimal impact on their production schedules given that most large-sizedcement companies utilise residual heat generation facilities, which in generalprovide 20-25% self-sufficiency for cement production. Overall, we believe largecompanies in central and eastern China should benefit the most as cementproduction in these regions could be severely affected, especially during theupcoming summer months. Hunan will be particularly affected, boding well forAnhui Conch.

Moreover, by the end of the 12th 5YP period, MIIT aims to lower (i) the coalconsumption per tonne to less than 93kg, (ii) emission of particulate matters (PM)by 50% from 2009, and (iii) emission of nitrogen oxide and carbon dioxide by25% from 2009. Again, we believe these measures will benefit big players as wellto enhance the whole sectors profitability. In 2009, RMB1bn out of the RMB40bnnet profit made by the cement industry resulted from the installation of residual

heat generation.

Shandong, Guangdong, Hunan and Shanxiset to be the key provinces for cementcapacity elimination, boding well for CNBMand Shanshui Cement


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Figure 27. New Dry Processing Capacity Growth Trend (2001-10)

-

20

40

60

80

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

m tonnes

-

200

400

600

8001,000

1,200

1,400

m tonnes

Shanxi (LHS) Zhejiang (LHS) Anhui (LHS)

Shandong (LHS) Guangdong (LHS) Guangxi (LHS)

Shaanxi (LHS) Xinjiang (LHS) National (RHS)


Figure 28. New Dry Processing Capacity Ratio in China

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Figure 29. Market Share Concentration Rates in China

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Top 10 Top 20


As of 2010, the top 20 cement enterprises concentration ratios in north, NE, eastand south China were all over 50%, while those for the NW and SW were lowerat 38% and 30%, respectively.


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Worries over Slowdown in Railway Construction

By the end of the 12th 5YP period, the Chinese government targets growth of atleast 40% for the transportation network, and high-speed railways, highwaysand ports will be the major focuses. According to the NDRC, by 2015, the totallength of highways should reach 100,800km, representing a 45.9% increase

from the current level. The total port capacity should reach 7.8bn tonnes by 2015,representing 41.8% expansion. The total length of railways should increase from91,000km to 120,000km, representing 32% growth, and high-speed railwaysshould reach 45,000km in length. The total length of railways in western Chinashould reach 50,000km.

Officials have already denied rumours that the Ministry of Railways would trim itsrailway construction budget this year from RMB700bn to RMB400bn. Moreover,the projects under construction would not be called to a stop. During 2010, thetotal investment in railways amounted to RMB709bn, with more than 30,000kmunder construction. In 2011, the total length of high-speed railways is expectedto increase from 8,358km to 13,000km.

While we think the budget this year will not be cut, the investment in railway

construction could slow after next year if the Ministry of Railways loss-makingsituation persists (MOR reported a RMB3.76bn loss in 1Q11). As such, WesternChina would be affected the most considering the aggressive railwaydevelopment, thus threatening WCC and Sinoma the most, in our view.

Slowdown in New Project Starts in a Few Regions

While we believe demand will stay strong in the near term, we also notice adecline in new project starts by 32-40% YoY during 1Q11 in several regions likeSW China, NE China and northern China. We believe the negative YoY growth ofFAI in new project starts for 1Q11 could be an early warning for the future fixedasset investments. This has negative implications on cement prices in the longerterm. Yet, we will need a more long-term trend to confirm its validity. Meanwhile,

another indicator for construction, the YoY growth in total new project starts inChina, has also been falling this year since April last year as shown in the figurebelow.

Figure 30. Chinas Number of Project Starts (by month) and Increasein Project Starts Compared to the Same Period Last Year

0

10,000

20,000

30,000

40,000

50,000

60,000

02/04

06/04

10/04

03/05

07/05

11/05

04/06

08/06

12/06

05/07

09/07

02/08

06/08

10/08

03/09

07/09

11/09

04/10

08/10

12/10

(40,000)

(20,000)

0

20,000

40,000

60,000

80,000

100,000

No. of project starts (LHS) Increase in project starts (RHS)


Concentration ratio remained highthroughout the past decade, and we seemore room for improvement in SW China(30%)

Western China would be affected mostconsidering the aggressive railwaydevelopment, which threatens WCC andSinoma the most in our view.

Be cautious on the slowdown in new projectinvestment growth, which has negativeimplications on cement prices later next year

Negative YoY growth innumber of new projectstarts compared with

April 2010, the first dropsince 2003


21/66



Figure 31. Increases in Number of New Project Starts and Number ofProjects under Construction

(40,000)

(20,000)

0

20,000

40,00060,000

80,000

100,000

120,000

02/04

08/04

02/05

08/05

02/06

08/06

02/07

08/07

02/08

08/08

02/09

08/09

02/10

08/10

02/11

Increase in number of projects starts

Increase in number of projects under construction


Due to delays in the accounting of new project starts in urban FAI figures, weseek to find out the correlation between the two variables by assuming aone-year lag time. As a result, the R2 is as high as 0.96 using the data between1997 and 2011.

Figure 32. Relationship between Urban FAI and FAI in New ProjectStarts (RMB m)

y = 12.331x + 61.593

R2

= 0.9737

0

50,000

100,000

150,000

200,000

250,000

300,000

0 5,000 10,000 15,000 20,000 25,000


Figure 33. Similar Trends of FAI Growth and New Project Start Growth

(40)

(20)

0

20

40

60

80

100

120

03/97

09/97

04/98

10/98

05/99

11/99

06/00

12/00

07/01

02/02

08/02

03/03

09/03

04/04

10/04

05/05

11/05

06/06

12/06

07/07

02/08

08/08

03/09

09/09

04/10

10/10

%

0

10

20

30

40

50

60%

New project start YoY growth (LHS) Urban FAI growth (RHS)



22/66



Strong Momentum Remains in Eastern China

In terms of new project starts, regions like eastern China still registered robustYoY growth of 44%. Specific provinces with positive growth were Gansu, Jilin,Anhui, Fujian, Shanxi and Shandong. If the number of new project starts is theleading indicator for future FAI growth and thus future cement demand, Anhui

Conch and CNBM should be the safer investments given their exposure, whilethe weakest links would be Sichuan and Inner Mongolia. On the other hand,provinces that recorded more than 40% YoY decline in new project growth wereNingxia, Beijing, Inner Mongolia, Sichuan, Guizhou, Liaoning and Henan, whereSinoma has the largest exposure among peers. Although both Shanshui andConch have exposure in these provinces as well, the latters exposure isrelatively small compared to its exposure in the provinces recording high projectstart growth, namely Anhui and Shandong.

Figure 34. New Project Start Growth in 1Q11 by Province

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%100%

120%

NChina

Beijing

Tianjin

Hebei

Shanxi

InnerMongolia

NEChina

Liaoning

Jilin

Heilongjiang

EChina

Shanghai

Jiangsu

Zhejiang

Anhui

Fujian

Jiangxi

Shandong

SChina

Henan

Hubei

Hunan

Guangdong

Guangxi

Hainan

SWC

hina

Chongqing

Sichuan

Guizhou

Yunan

Tibet

NWC

hina

Shaanxi

Gansu

Qinghai

Ningxia

Xinjiang


Figure 35. Anhuis FAI Growth and New Project Start InvestmentGrowth

0%

20%

40%

60%

80%

100%120%

140%

2M09

3M09

4M09

5M09

6M09

7M09

8M09

9M09

10M09

11M09

12M09

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

20%22%

24%26%

28%30%

32%34%

36%38%

New project start investment (LHS) FAI growth (RHS)


Anhui accounts for over 55% of AnhuiConchs total capacity


23/66



Figure 36. Zhejiangs FAI Growth and New Project Start InvestmentGrowth

-50%

0%

50%

100%

150%

200%

2M09

3M09

4M09

5M09

6M09

7M09

8M09

9M09

10M09

11M09

12M09

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

0%

5%

10%

15%

20%25%

30%

35%



Figure 37. Shandongs FAI Growth and New Project Start InvestmentGrowth

0 %

20 %

40 %

60 %

80 %

100 %

2M09

3M09

4M09

5M09

6M09

7M09

8M09

9M09

10M09

11M09

12M09

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

16%

17%

18%

19%

20%

21%

22%

23%

24%



Figure 38. Guangxis FAI Growth and New Project Start InvestmentGrowth

-50%

0%

50%

100%

150%

2M09

3M09

4M09

5M09

6M09

7M09

8M09

9M09

10M09

11M09

12M09

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

20%

25%

30%

35%

40%

45%

50%

55%

60%



Zhejiang is the largest sales market to CNBM,accounting for 27% of its total capacity

Shandong accounts for more than 70% ofShanshui Cements total capacity and 14%of CNBMs total capacity

Guangxi accounts for over 50% of CRcements total capacity and 12% of Anhui

Conchs total capacity


24/66



Figure 39. Shaanxis FAI Growth and New Project Start InvestmentGrowth

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

27%

28%

29%

30%

31%32%

33%

34%



Figure 40. Summary of Positives and Negatives for Cement Sector

Positives Negatives

1) Power shortage/rationing - we think it will bemore severe during summer, boding well forcement prices

Slowdown in new project starts couldthreaten cement demand

2) Rapid urbanisation Easing impact from the RMB4trn stimuluspackage

3) Demand from social housing (Budget:RMB1.3trn)

Worries over the governments funding forinfrastructure projects

4) Demand from water projects (Budget:RMB400bn/year for 10 years, doubling thebudget in 11th 5YP)

National property sales (GFA) contractedby 10% YoY in April 2011 and saw 6.4%YoY growth in 4M11, a significant

slowdown compared to 4M10s 32.8% YoYgrowth

5) Demand from high-speed railways (Budget:RMB700bn/year and RMB3.5trn throughout12th 5YP)

6) Demand from highways (Total budget overRMB10trn over 12th 5YP, compared toRMB7.7trn in 11th 5YP)

7) Housing FAI remained high at 34.1% in 1Q11

Source: BOCI Research

Shaanxi accounts for 100% of West ChinaCements capacity


25/66



PROVINCIAL ANALYSIS

Our Favourite Regions for Cement Exposure

We have created a matrix putting all our demand/ supply analyses in one table to

select our favourite regions based on six criteria, categorised by (i) potential inconsolidation and (ii) improving demand and supply dynamics. In conclusion, wefavour eastern and southern China most. Please see the figure below for ourranking of each province.

The six criteria are:

1) % of new dry process lower than the national average of 75%

2) Clinker capacity per capita of more than 1,000kg

3) Average production per enterprise lower than the national average

4) Higher urban FAI growth than the national average

5) Higher housing FAI growth than the national average

6) Higher-than-average new project start growth


26/66



Figure 41. Matrix for Preferred Province Selection

National

Averageproduction/enterprise

Clinkercapacity

per capita

1Q11 CementFAI growth

(%)

1Q11 urbanFAI growth

(%)

1Q11 hous ingFAI growth

(%)

1Q11 Newproject growth

(%)

Beneficiariesfrom social

housing

Beneficiariesfrom

waterway

Beneficiariesfrom

transportationnetwork

N China 89 (30.8) 6.0 29.5 (31.5)

Beijing 128 441 NA 11.9 14.0 (59.3) X XTianjin 117 296 23.7 29.0 25.4 (15.2) X

Hebei 103 1,093 (28.6) 26.7 59.4 (27.1)

Shanxi 43 1,116 (22.4) 25.1 31.7 21.0 X X

Inner Mongolia 54 1,717 (49.9) 20.5 53.2 (56.9) X

NE China 75 (16.7) 11.8 29.4 (37.1)

Liaoning 43 1,076 (21.2) 30.3 29.7 (48.1) X

Jilin 134 762 72.1 31.4 28.1 66.2 X

Heilongjiang 48 316 (44.9) 18.8 23.4 (26.1) X

E China 136 7.1 16.9 34.1 119.3

Shanghai 192 74 NA (7.4) 11.3 2.7 X X

Jiangsu 138 986 27.7 23.1 33.9 (0.7) X

Zhejiang 136 1,388 (22.9) 26.6 34.3 20.6

Anhui 137 1,676 29.5 34.3 49.7 52.6 X X

Fujian 124 1,135 40.3 32.9 52.7 38.3

Jiangxi 116 1,125 4.3 33.4 20.2 (31.4)

Shandong 111 1,361 (35.5) 21.2 37.2 23.4 X

S China 133 (35.6) 16.2 32.2 (23.7)

Henan 128 930 (60.3) 27.9 35.7 (45.6) X

Hubei 147 1,048 (47.6) 33.2 43.7 (32.7) X

Hunan 70 1,138 (26.8) 31.5 34.6 (22.2)

Guangdong 109 1,138 (62.8) 13.6 28.5 (3.2) X

Guangxi 101 1,277 39.0 32.0 21.4 (23.8)

Hainan 243 1,117 (98.7) 34.0 35.6 (35.6) X

SW China 103 (30.6) 21.3 44.5 (39.7)

Chongqing 119 1,649 2.2 20.0 43.4 (31.8) X

Sichuan 131 1,389 (44.1) 24.3 36.0 (53.5)

Guizhou 63 927 (40.9) 48.9 99.3 (53.3) X

Yunnan 100 959 64.6 20.5 39.9 (8.3) X

Tibet NA 840 NA 57.9 48.7 25.6 X

NW China 65 (19.4) 19.6 31.8 2.4

Shaanxi 100 1,162 (27.5) 28.2 26.9 (20.2) X

Gansu 64 815 (38.9) 41.6 43.3 97.4 X

Qinghai 81 1,026 273.7 40.6 28.0 (18.6) X

Ningxia 37 2,379 22.0 41.3 29.1 (77.7) X

Xinjiang 46 1,292 (40.5) 15.4 79.4 (26.6) X

National average 105 1,105 (23.5) 25.0 34.1 (12.1)

* Shaded in pink - favoured provinces

* Least favoured provinces - Shanghai, Ningxia, Inner Mongolia, Qinghai, Yunnan


Figure 42. Regional Scores

Averageproduction/

enterprise

1Q11cement FAI

growth1Q11 urbanFAI growth

1Q11housing FAI

growth

1Q11 newprojectgrowth

Totalscore

N China 4 2 6 5 4 21

NE China 5 5 5 6 5 26

E China 1 6 3 2 1 13

S China 2 1 4 3 3 13

SW China 3 3 1 1 6 14

NW China 6 4 2 4 2 18



27/66



Figure 43. Seasonality by Province (% of full-year demand)

(%) National North NE Eastern Southern SW NW

Jan 5.57 3.64 2.62 5.99 6.46 7.07 3.06

Feb 4.92 42.5 3.04 5.18 5.52 5.92 3.13

Mar 7.5 7.54 6.03 7.84 7.31 8.24 6.8

Apr 8.7 8.84 8.7 8.91 8.11 8.64 9.3May 9.18 9.52 10.86 9.32 8.61 8.13 10.67

Jun 9.39 10.65 12.2 9.03 8.61 8.75 11.02

Jul 8.65 9.93 10.86 8.35 8.05 7.87 10.21

Aug 8.9 9.65 11.1 8.53 8.61 7.97 10.52

Sep 9.24 9.99 11.7 8.86 8.92 8.33 10.56

Oct 9.32 9.78 10.35 9.15 9.32 8.75 9.5

Nov 9.4 9.02 6.9 9.46 10 9.7 8.67

Dec 9.23 7.18 5.64 9.39 10.5 10.64 6.57

*Shadedinorange peakseasons;shadedingrey lowseasons

Source:DigitalCement,BOCIResearch

Cement demand has been relatively stable throughout the year in eastern Chinawithout significant seasonal fluctuations. Approaching 2Q, more rapid ramp-upin demand should be found in NE and NW China.

Based on our matrix selection, eastern China and southern China, which bothhave the lowest scores in the figure above, are our most preferred regions, whileNE China is our least favoured.

Figure 44. Cement Companies Coverage by Province

ShanshuiCement

AnhuiConch CNBM

China ResourcesCement Sinoma

West ChinaCement

Stock code 691.HK 914.HK 3323.HK 1313.HK 1893.HK 2233.HK

Eastern China Zhejiang 2.0 56.0

Jiangsu 4.8 24.0 7.0

Shanxi 1 (10m by 2011E) 2.6

Shanghai 4.0

Fujian 3.0

Shandong 48.1 28.0

Henan 13.6

N China Beijing

Hebei 14.0

Liaoning 12.2 1.8

Inner Mongolia 5.2 7.0 4.1

Central China Anhui 72.7 2.0 4.0

Hunan 9.7 22.0 5.0Jiangxi 10.6 24.0 1.0

Southern China Guangdong 13.2 13.4 7.0

Guangxi 15.7 25.4

Hainan 4.0

NW China Hubei

Xinjiang 3m by 2012e 15.4

Gansu 1.6 15.2

Qinghai 1.0

Jilin 5.6

Shaanxi 2.0 2.0 12.5

Ningxia 8.8

SW China Sichuan 8.7

Heilongjiang 5.6Chongqing 2.0

Total 66.5 150 200.6 48.4 70.5 12.5

Exposure in our favoured provi nces 72% 59% 50% 42% 37% 0%

*Favoured provinceSource: Company data, BOCI Research


28/66



PEER COMPARISONS

In the figures below, we rank the cement companies using our 2010-13E CAGRin sales volume, tonnage gross profit and net profit. We rank each dynamic from1 to 5 and the company with lowest score is the most preferred.

Figure 45. Sales Volume Forecasts

Sales volume 2009 2010 2011E 2012E 2103E CAGR Ranking

Anhui Conch 118 137 170 212 235 20% 3

CNBM 113 153 202 238 257 19% 4

Shanshui Cement 38 49 60 66 74 15% 5

China Resources Cement 19 33 50 64 69 28% 1

West China Cement 5 10 14 16 18 22% 2

Source: Company data, BOCI Research

Figure 46. Cement Capacity ForecastsCement capaci ty 2009 2010 2011E 2012E 2103E CAGR Ranking

Anhui Conch 110 150 177 210 235 16% 3

CNBM 160 204 236 266 286 12% 5

Shanshui Cement 48 67 82 90 100 14% 4

China Resources Cement 29 48 62 78 84 21% 2

West China Cement 8.5 12.5 17 18 24 24% 1


Figure 47. Gross Profit per Tonne

Gross pro fit per tonne 2007 2008 2009 2010E 2011E 2012E 2013E

CAGR

(2010-13E) RankingAnhui Conch 66 58 60 80 116 121 128 17% 3

CNBM 29 35 35 56 110 116 125 31% 1

Shanshui Cement 36 52 47 51 94 95 100 25% 2

China Resources Cement 70 62 79 106 114 122 129 7% 4

West China Cement 73 88 127 118 112 115 122 1% 5


Figure 48. Gross Profit per Tonne Trend

0

50

100

150

2006 2007 2008 2009 2010 2011E

(RMB/tonne)

Anhui Conch CNBM

Shanshui Cement China Resources CementWest China Cement



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Figure 49. Net Profit Growth Forecasts

Net pro fit growth 2010 2011 2012 2013 CAGR Ranking

Anhui Conch 6,163 12,570 16,209 19,124 46% 2

CNBM 3,742 6,349 8,229 9,405 36% 4

Shanshui Cement 979 2,707 2,976 3,531 53% 1

China Resources Cement 2,041 3,697 4,983 5,719 41% 3West China Cement 998 1,128 1,302 1,607 17% 5


Figure 50. Comparison of Companies Downstream Exposure

Downstream exposure Real estate Infrastructure Rural area Distributors Ready mix

Anhui Conch 33% 40% 27%

CNBM 15% 40% 45%

Shanshui Cement 33% 20% 18% 28%

China Resources Cement 20% 50% 30%

West China Cement 0% 44% 10% 39% 7%

Whole sector 30% 40% 30%


Figure 51. Market Share Comparisons (based on 2010 cement capacities)

Eastern China Central China Southern China

0.0%

5.0%

10.0%

15.0%Anhui Conch

CNBM

ShanshuiCement

China Resources

Cement

West ChinaCement

Asia Cement

0.0%

5.0%

10.0%

15.0%Anhui Conch

CNBM

ShanshuiCement

China Resources

Cement

West ChinaCement

Asia Cement

0.0%

10.0%

20.0%

30.0%Anhui Conch

China

Resources

Cement

CNBMShanshui

Cement

Asia Cement

SW and NW China Northern China

0.0%

0.5%

1.0%

1.5%

2.0%Anhui Conch

CNBM

Shanshui

Cement

China Resources

Cement

West China

Cement

Asia Cement

0.0%

1.0%

2.0%

3.0%

4.0%Anhui Conch

CNBM

Shanshui

Cement

China Resources

Cement

West China

Cement

Asia Cement



30/66


31/66


Initiating Coverage 25 May 2011

30% sideBUYTarget Price: HK$40.70

914 HK

Price: HK$ 31.30

TP Basis: EV/tonne, P/E, EV/EBITDA

Sector Rating: OVERWEIGHT


Our 2010-13 earnings estimates are 10-14% aboveconsensus as we think ASP has beenunderestimated.

We compare Conchs cost trends with peers, andbelieve Conch will sustain its cost advantage


Comparisons showing thecompanys efficient cost control.

Figures 8-9

Cement demand driven by socialhousing in Conchs major markets.

Figure 10

Earnings sensitivity to coal, cementprices and sales volume.

Figure 20

Key BOCI Event

Analyst marketing in Hong Kong 26-27 May

Trading Summary

H - Anhui Conch (914 HK)

12

17

22

27

32

37

42

81

108

134

161

188

214

241Price Close Relative to HSCEI (RHS)

Source: Bloomberg.

10

20

30

40

May-

10

Jul-

10

Sep-

10

Nov-

10

Jan-

11

Mar-

11

May-

11

Volth

YTD 1M 3M 12M

Absolute (%) 28.8 -13.9 34.5 99.8Relative to HSCEI (%) 28.9 -6.7 29.3 87

Shares outstanding 5,300

Free float (%) 0.0

Market cap. (HK$ m) 152,249

Daily turnover (3M avg.) 12.50

Net debt / Equity (%) 18.6

Major shareholder (%)

Anhui Conch Holdings Co Ltd 36.2


China: Industrials

Michelle Leung(852) 3988 [email protected]

Investment Summary 12-09 12-10 12-11E 12-12E 12-13E

Total turnover (RMB m) 24,998 34,508 53,879 71,859 84,430

Revenue growth 3.2% 38.0% 56.1% 33.4% 17.5%

Net profit (RMB m) 3,506 6,163 12,570 16,209 19,124

Fully diluted EPS (RMB) 2.03 1.74 2.37 3.06 3.61

FD P/E (x) 12.87 14.99 11.03 8.55 7.25

FDEPS growth 22.9% (14.2%) 36.0% 29.0% 18.0%

Previous EPS (RMB) NA NA NA NA NA

Consensus EPS (RMB) 2.16 2.68 3.22

EPS vs Consensus 9.6% 13.9% 12.2%

Recurrent CPS (RMB) 3.98 1.13 3.22 3.71 4.36

P/CF (x) 6.57 23.06 8.11 7.04 6.00

EV/EBITDA (x) 8.51 15.08 7.68 5.84 4.76Dividend/share (RMB) 0.350 0.233 0.474 0.612 0.722

Dividend yield 1.34% 0.89% 1.81% 2.34% 2.76%

ROE 13.3% 19.6% 31.8% 30.1% 27.0% Source: Company data, Bloomberg data, BOCI Research estimates. Closing prices are as of 18 April 2011.

Anhui Conch

Attractive risk/reward with AnhuiexposureWe initiate coverage on Anhui Conchs H shares with a BUY rating and atarget price of HK$40.70. As the second largest cement producer in Chinaand one of the countrys most cost-efficient producers, we believe Conchshould trade at a premium to peers. Moreover, we see the company as oneof the biggest beneficiaries of social housing construction projects goingforward. Despite its large size, we expect its net profit to register a 46%CAGR in 2010-13 and believe it will become one of the fastest growingcompanies in the cement universe. Trading at only 11x 2011 P/E vs. its

mid-cycle P/E of 15.6x, we think now is a good time to BUY.

46% Earnings CAGR in 2010-13E, 10-14% above Consensus

Conch should continue to surprise the market with robust earnings growth after1Q11. While our 2011-13 earnings estimates are 10-14% higher than consensus,we think this is reasonable given that 1Q11 already accounted for 18% of ourfull-year forecast and that the first quarters accounted for 9-17% of full-yearearnings in 2007-10.

Attractive Risk Reward

Despite its large size, we expect strong earnings growth going forward. We likethe companys dominant position in Anhui, which has consistently delivered robustFAI, housing FAI and newly started project growth.

Conch should benefit greatly from social housing developments.

Given its efficient cost management, its high margin is more likely to remainsecure even if cement prices correct.

Attractive Valuation

Trading at only 11x 2011 P/E and about US$ 100 EV/tonne, Conchs valuation is atthe low end of its historical range.

Valuation Methodology

To value Anhui Conch, we use a blended methodology of EV/tonne, EV/EBITDAand P/E. Using the industry average with a 10% premium, we value Conch basedon EV/tonne of US$110, 2012 P/E of 10.3x and 2012 EV/EBITDA of 6.9x. Takingthe average, we derive our target price of HK$40.70 (representing 14.3x 2011P/E), which is in line with its mid-cycle P/E valuation.


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Anhui Conch Price: HK$31.30BUY Target Price: HK$40.70Michelle Leung 25 May 2011


VALUATION

While our estimates for Conchs 2011-13 earnings are 10-14% above consensus,we think our numbers are reasonable as 1Q11 earnings only imply 18% of ourfull-year estimate, versus the 9-17% of full-year earnings in 2007-10. Anhui

Conch is our top pick in the sector given its high market share in its existingmarkets, solid cost control and quality management. While we expect thecompanys rapid growth to persist, we think its risk-return profile is the mostattractive among peers. We like the companys dominant position in Anhui,which is among our most favoured provinces in terms of consistently high FAIgrowth, housing FAI growth and newly started project growth. Moreover, wethink Conch will be one of the biggest beneficiaries of social housing projectsgiven its sales market layout and high exposure to real estate (33% in 2010). Inview of its strong financials and proven execution ability, we believe thecompany should deliver promising earnings growth. Given our belief that thestreet has underestimated its earnings, upgrades may be imminent, which wouldprovide a further share price catalyst. Trading at only 11x 2011 P/E and aroundUS$100 EV/tonne, we now see a good buying opportunity.

To value Anhui Conch, we employ a blended methodology of EV/tonne,EV/EBITDA and P/E. Using the industry average with a 10% premium, we valueConch based on EV/tonne of US$110, 2012 EV/EBITDA of 6.9x and 2012 P/E of10.3x. Taking the average, we derive our target price of HK$40.70 (representing14.3x 2011 P/E), which is still in line with Conchs mid-cycle P/E. We initiatecoverage with a BUYrating.

Figure 1. Valuation Table

HK peeraverage

Discount Target multipleSegmental value

(HK$ m)

EV/tonne (US$/tonne) 100

Bull case 20% 120 184,200

Base case 10% 110 167,672

Bear case 0% 100 151,144

2012 EV/EBITDA 6.3

Bull case 20% 7.56 206,827

Base case 10% 6.93 188,413

Bear case -10% 5.67 151,586

2012 P/E 9.4

Bull case 30% 12.22 231,942

Base case 10% 10.34 196,258

Bear case -20% 7.52 142,733

Target price

Bull case 45.9

Base case 40.7

Bear case 32.8



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SWOTANALYSIS

Figure 2. SWOT Analysis

Strengths Weaknesses

The second largest cement producerin China after CNBM.

Leading position should make thecompany one of the majorbeneficiaries under the industryconsolidation theme

Dominant position in Anhui

Strong financials with low leverageand abundant cash flow

Quality management

Approximately 25% exposure inproperty market

Energy cost accounts for almost 70% oftotal cost, higher than the industryaverage of 65%

Opportunities Threats

Cement price growth potential in SEChina

New development in SW Chinashould benefit the company under theWestern China Development Plan

Adverse impact from property marketshould be mitigated by the aggressivesocial housing construction plan in

Anhui

Any slowdown in government spendingor any tightening policies could averselyaffect cement demand

Big threat from high coal prices andpower costs

Loss of market share to otheraggressive cement producers

Source: BOCI Research estimates

Figure 3. Capacity by Region

2010 2011E

Central

China

30%

E China

38%

Exports

6%

W China

5%

S China

21%

S China

20%

W China

12%

Exports

9%E China

31%

Central

China

28%



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Figure 4. Sales Exposure by Segment

2009 2010

Rural areas

33%

Property

22%

Infrastructure

45% Infrastructure40%

Property

33%

Rural areas

27%


Figure 5. Conchs Market Share in China is Expanding

2%

3%

4%

5%

6%

7%

8%

9%

2005 2006 2007 2008 2009 2010 2011E 2012E 2013E


Promising Earnings CAGR of 46%

According to company guidance, Conchs 2011 clinker and cement capacityshould grow by 24.5% YoY (+31.8m tonnes) and 17.9% YoY (+26.9m tonnes)to 162m tonnes and 177m tonnes, respectively. We think this is achievable given

the companys strong track record in capacity expansion (around 20% CAGR)during 2005-10. We assume the its cement capacity utilisation will remain ataround 80% in 2011, implying sales volume of 170m tonnes and growth of 24%YoY. During 2011-13, the company should continue to gain market share byadding 20-30m tonnes of capacity each year.

In terms of geographical exposure, sales in the western China region grew at thefastest rate in 2010 (up 293% YoY to 7.45m tonnes), while that in central China,southern China and the eastern China rose by 21%, 7% and 6%, to 41.7mtonnes, 28.7m tonnes and 51.2m tonnes, respectively.

Conchs ASP rose sharply in 4Q10 (up 32% QoQ and 49%YoY) to RMB314/tonne,the historical peak. Although the low season in 1Q11 resulted in an 11% QoQdecline in ASP, we expect it to pick up by 13% QoQ to RMB316/tonne in 2Q11.We expect full-year ASP of RMB317/tonne, representing 28% YoY growth. ByApril, ASP had already hit RMB310/tonne, RMB30 higher than in 1Q11. Grossprofit per tonne also increased to RMB140, RMB16 higher than in 1Q11.


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Figure 8. Conch has consistently been one of the Lowest-cost CementProducers in our Coverage Universe

0

50

100

150

200

250

300

2007 2008 2009 2010 2011E 2012E 2013E

Rmb/tonne

Conch CNBM Shanshui CR Cement WCC


Figure 9. Comparison of Cement Production Cost CAGRs for 2007-10

0%

2%

4%

6%

8%

10%

12%

Conch CNBM Shanshui CR Cement WCC


Favorable Exposure in Anhui Province

Conch has considerable exposure in the property sector (33% of total sales in2010 compared with only 22% in 2009), which we believe is a result of benefitingfrom the robust demands from social housing. Meanwhile, commodity housingconstruction remained robust as reflected by the high housing FAI growth of

34% in 1Q11. Within this, Anhui, Guangxi, Guangdong and Jiangxi (contributingroughly 78% of Conchs total sales volume in 2010) recorded housing FAI growthof 20-50% YoY in 1Q11. Anhui alone reported 49.7% YoY growth in housing FAIgrowth during the quarter.

While investors worry whether its large property exposure will mean higher riskshould the market slump, our view is that social housing construction is likely tooffset the slowdown in commodity housing projects. As calculated in Figure 21 ofour sector report, we believe that if the social housing achievement rate exceeds70% this year and 50% next year, it could offset a 30% fall in commodityhousing GFA starts each year.


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Figure 10. Cement Demand Derived from Social Housing in Conchs Major Markets

2010

(m units)

2011 target

(m units)

YoYgrowth

(%) % of total

(A) Potentialcement

demandsdriven by

social housing

(mt)

(B) PotentialCement demandIncremental in

2011 (mt)

Incremental cementdemand growth in 2011

driven by social housing

(= B/C) (%)

Actual cementdemand in 2010

(C)Anhui Conch

Guangxi 0.07 0.29 297 3 4.47 3.34 4 74.6

Hunan 0.27 0.45 66 4 6.88 2.74 3 87.0

Guangdong 0.13 0.31 148 3 4.77 2.85 2 115.4

Zhejiang 0.27 0.38 43 4 5.85 1.76 2 112.8

Jiangsu 0.21 0.32 50 3 4.93 1.63 1 156.5

Anhui 0.35 0.40 14 4 6.16 0.75 1 78.7

Sichuan 0.34 0.36 4 4 5.51 0.23 0 132.3

Jiangxi 0.24 0.23 (5) 2 3.54 (0.20) 0 62.2

Heilongjiang 0.71 0.69 (2) 7 10.66 (0.20) (1) 35.1

Chongqing 0.52 0.50 (4) 5 7.70 (0.31) (1) 46.0

Gansu 0.17 0.15 (12) 2 2.31 (0.31) (1) 24.1Source: Provincial governments, BOCI Research

Furthermore, unlike many provinces in China that have reported a significantslowdown in new project starts, Anhui (which accounts for more than 55% ofConchs total capacity) reported exceptionally high growth of 53% YoY in newstarts during 1Q11, which was even stronger than the 14.1% posted in 2010.

Figure 11. Growth of New Project Starts in Conchs Major Markets

-30 %

-20 %

-10 %

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

2M09

4M09

6M09

8M09

10M09

12M09

3M10

5M10

7M10

9M10

11M10

2M11

Anhui Guangdong Guangxi Jiangxi



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Figure 12. Growth of New Project Starts in Conchs Major Markets

-60 %

-40 %

-20 %

0 %

20 %

40 %

60 %

80 %

100 %

120 %

140 %

12M09

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

10M10

11M10

12M10

2M11

3M11

Anhui Guangdong Guangxi


Figure 13. FAI Growth in Conchs Major Markets

0 %

10 %

20 %

30 %

40 %

50 %

60 %

2M09

4M09

6M09

8M09

10M09

12M09

3M10

5M10

7M10

9M10

11M10

2M11

Anhui Guangdong Guangxi Jiangxi



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FINANCIALS

Revenue

There is a distinct seasonal pattern in Conchs sales volume (as shown in the

figure below) leading to a clear uptrend throughout the year. Having said that,the first quarter is always the slow season for the cement sector, usuallyaccounting for a mere 17-20% of full-year revenue. Conchs 1Q11 revenueaccounted for 17% of our full-year estimate.

Figure 14. Conchs Sales Volume by Quarter

0

5

10

15

20

25

30

35

40

1Q 2Q 3Q 4Q

(m tonnes)

2008 2009 2010


Cost Breakdown

Coal has always been Conchs largest cost component, consistently making upmore than 40% of total cost per tonne. Thanks to the higher efficiency, coalconsumption per tonne has been lowered from 130kg/tonne in 2007 to onlyaround 108kg/tonne, and by end-2015, we believe coal consumption could belowered to 92kg if the governments target is followed.

Figure 15. Breakdown of Conchs Production Cost in 2010

Coal

47%

Power

20%

Raw materials

14%

Labour

2%

Manufacturing

cost

2%

Depreciation

15%



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Figure 16. Conchs Production Cost per Tonne

0

50

100

150

200

250

1Q 2Q 3Q 4Q

RMB/tonne

2008 2009 2010 2011


Figure 17. Conchs Gross Profit per Tonne and ASP Comparison

6080

131 137146

209

248

317339

359

0

50

100

150

200

250

300

350

400

2009 2010 2011E 2012E 2013E

RMB/tonne

0

10

20

30

40

50

60

70

GP/tonne ASP GP/t YoY


Figure 18. Conchs Free Cash Flow Turning Positive

(8,000)

(6,000)

(4,000)

(2,000)

0

2,0004,000

6,000

8,000

10,000

12,000

2008 2009 2010 2011E 2012E 2013E

RMB m

Free cash flow to firm Free cash flow to equity



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Figure 19. Conchs Improvement in ROE due to Higher Profitability

0.10

0.15

0.20

0.25

0.30

0.35

2008 2009 2010 2011E 2012E

(% )


Low Gearing

As of March 2011, Conch had RMB3.07bn in cash, with total loans up slightly by2% in 1Q11 to RMB13.27bn. Net gearing dropped from 28.8% in 4Q10 to 26.4%in 1Q11, very low compared with peers. The relatively low gearing should lasteven after the recent approval of the RMB9.5bn bond issuance. Looking forward,we estimate yearly capex of around RMB12-13bn, which should be totallycovered by its operating cash inflow amounting to RMB17bn-23bn over the nextthree years, according to our estimates.


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KEY RISKS

Property slump. While the property sector accounts for more than 33% of thecompanys total sales, any delay in social housing projects or significantslowdown in commodity housing demand could lead to undesirable impacts on

earnings. Having said that, we believe its sales exposure can be rather flexibledepending on downstream demand.

Resumption of new production line approvals. Any change in the policy(effective since September 2009) that stipulates no new cement production linesto be built could easily trigger oversupply once again. However, we do notbelieve the government will allow new lines to be built in the near term, at leastuntil all outdated capacity is eliminated and the market concentration rate rises.We believe policies should remain favourable to large players.

Price caps. Since cement prices have been rising substantially since 4Q10,some provinces like Fujian and Hainan imposed price caps last year. However,we do not expect a nationwide rollout as we believe cement prices are still low ingeneral. We reckon that the regions with higher risk of potential price caps are

Xinjiang and Tibet as the P.O. 42.5 cement prices in both places have reachedRMB600/tonne.


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SENSITIVITY ANALYSIS

Based on our sensitivity analysis, ASP appears to be the most earnings-sensitivevariable, followed by coal prices and sales volume. Every 10% increase in ASPwould result in a net profit boost of approximately 29%, while every 10%

increase in the coal price would lead to a 9% decline in earnings, assuming noother changes.

Figure 20. 2011 EPS Sensitivity Analysis

EPS impact

10% increase in coal price -9%

10% increase in cement ASP +29%

10% increase in sales volume +10%

Source: BOCI Research estimates


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COMPANY BACKGROUND

Anhui Conch, a state-owned enterprise, is the second largest cement producer inChina after CNBM in terms of production capacity. As of 2010, the company hada capacity of 150m tpa, equivalent to a market share of approximately 7.7% in

China. Conch was listed on the Hong Kong Stock Exchange in September 1997and the Shanghai Stock Exchange in February 2002 (600585 CH). Its parentcompany, Anhui Conch Group, has a 35.7% stake in the company. Thecompanys business scope covers the manufacture and sales of cement andclinker under the brand name Conch.

Conchs markets fall in a T shape, with Anhui at the intersection. Western China(Sichuan, Chongqing and Gansu), central China (Anhui, Jiangxi and Hunan) andeastern China (Jiangsu, Zhejiang, Fujian and Shanghai) form the top whilesouthern China (Guangdong and Guangxi) form the bottom. While maintainingits leading position in its existing markets, the company has been consolidatingits presence in new markets through mergers and acquisitions.

Figure 21. Company Shareholding Structure

State-owned Assets Supervision andAdministration Commission of Anhui Province

Anhui Province Investment Group Limited

Anhui Conch Holdings Company Limited

Anhui Conch Cement Company Limited

100%

51%

35.7%

State-owned Assets Supervision andAdministration Commission of Anhui Province

Anhui Province Investment Group Limited

Anhui Conch Holdings Company Limited

Anhui Conch Cement Company Limited

100%

51%

35.7%


Figure 22. Conch still Trading at Low End of P/E Range

0

10

20

30

40

50

60

01/00

07/00

01/01

07/01

01/02

07/02

01/03

07/03

01/04

07/04

01/05

07/05

01/06

07/06

01/07

07/07

01/08

07/08

01/09

07/09

01/10

07/10

01/11

P/E Average Avg + 1 SD Avg -1 SD

(x)

Source: Bloomberg, BOCI Research


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Cash-flow Statement (RMB m)

12-09 12-10 12-11E 12-12E 12-13E

Pre-tax profit 4,508 8,115 17,211 22,194 26,185

Depreciation 1,605 1,966 2,431 2,935 3,435

Goodwill & other amort. - - - - -

Net interest 451 514 521 587 606Change in working capital 1,703 (1,867) 1,083 1,293 120

Tax paid (882) (1,770) (4,270) (5,507) (6,497)

Other operating cash flow (358) (920) 141 (1,790) (714)

Operating cash flow 7,029 6,010 17,087 19,676 23,092

Capex (8,000) (9,300) (12,000) (13,000) (13,000)

Cash flow from disposals 160 202 248 307 370

Acquisition of subsid iaries - - - - -

Others 27 (1,244) 0 0 (0)

Cash flow from investing (7,813) (10,341) (11,752) (12,693) (12,630)

Shares repurchased - - - - -

Debt issued

Proceeds from issue of shares - - - - -

Interest received - - - - -Dividends paid (618) (1,233) (2,514) (3,242) (3,825)

Interest paid - - - - -

Other cash flow from funding (1,776) 4,680 1,601 282 -

Cash flow from financing (2,395) 3,447 (913) (2,960) (3,825)

Total cash generated (3,178) (884) 4,423 4,023 6,637

Free cash flow to firm (784) (4,331) 5,335 6,983 10,462

Free cash flow to equity (784) (4,331) 5,335 6,983 10,462

Key Ratios

12-09 12-10 12-11E 12-12E 12-13E

Profitability

EBITDA margin 24.8% 29.2% 36.2% 34.7% 34.7%

EBIT margin 18.4% 23.5% 31.7% 30.7% 30.7%

Pre-tax margin 18.0% 23.5% 31.9% 30.9% 31.0%

Net profit margin 14.0% 17.9% 23.3% 22.6% 22.7%

Liquidity

Current ratio 0.9 1.0 1.1 1.2 1.4

Interest coverage ratio 10.2 15.8 32.7 37.5 42.7

Net debt to equity 21% 32% 19% 7% Net cash

Quick ratio 0.7 0.8 0.9 1.0 1.2

Valuation

P/E (x) 13.2 22.5 11.0 8.6 7.2

Core P/E (x) 13.3 22.5 11.0 8.6 7.2

P/B (x) 1.6 4.0 3.1 2.2 1.8

P/CF (x) 6.6 23.1 8.1 7.0 6.0EV/EBITDA (x) 8.5 15.1 7.7 5.8 4.8

Activity ratios

Inventory days 44.1 38.6 44.9 44.5 44.4

Accounts rece ivables days 44.2 67.7 67.7 67.9 67.7

Accounts payables days 86.8 62.0 115.3 114.2 114.0

Returns

Dividend payout ratio 17.6% 20.0% 20.0% 20.0% 20.0%

ROE 13.3% 19.6% 31.8% 30.1% 27.0%

ROAA 7.8% 11.5% 18.1% 17.7% 16.7%

ROACE 12.4% 18.5% 30.9% 31.2% 29.3% Source: Company data, Bloomberg data, BOCI Research estimates

Expect margin to stay high overthe next few years



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Initiating Coverage 25 May 2011

19% sideBUYTarget Price: HK$17.30

3323 HK

Price: HK$ 14.58

TP Basis: Sum of parts

Sector Rating: OVERWEIGHT


Our EPS estimates are 3.5% below and 2% higherin 2011/12


CNBMs latest operational data in April

2011

P. 5

CNBMs latest market share in eachprovince

Fig 12

Earnings sensitivity to coal, cementprices, sales volume and interest rate

Fig 10

Trading Summary

H - China National Building Material (3323 HK)

5

7

9

11

13

15

17

19

80

109

137

166

194

223

251

280P ri ce C lo se R el at ive t o H SC EI (R HS )

Source: Bloomberg.

20

40

60

80

100

120

May-

10

Jul-

10

Sep-

10

Nov-

10

Jan-

11

Mar-

11

May-

11

Volth

YTD 1M 3M 12M

Absolute (%) 63.6 -5.9 58 141.4Relative to HSCEI (%) 63.7 1.3 52.8 128.6

Shares outstanding 5,399

Free float (%) 59.0%

Market cap. (HK$ m) 78,718

Daily turnover (3M avg.) 35.80

Net debt / Equity (%) 132.3

Major shareholder (%)

CNBM Group 48.8

CNBMs Key End Consumers by Segment

China United South Cement

Infrastructure 40% 20%

Urban development 45% 70%

Real estate 15% 10%


China National

Building MaterialRepeating its eastern Chinaconsolidation in the northChina National Building Materials ( CNBM) sales moment um remains strongw ith elevated profitabilit y throughout 4 M11. Going forward, the companysgrowth in the cement business should be sustained by its aggressiveexpansion targets. We believe CNBM can repeat its eastern China success

story in nort hern China going forw ard. Aft er more than a 15% share pricecorrection over the past month, we believe attractive valuation hasemerged. We initiat e coverage wi th a BUYcall on t he stock.

Long-term BUY on Consolidation in N. China

CNBM targets to expand aggressively in northern China. We expect NorthCements capacity to expand at a 32% CAGR in 2010-13 to 30m tonnes, muchfaster than South Cements 16% CAGR and China Uniteds zero growth.

We think the company can repeat its successful eastern China consolidation in thenorth. However, we see it taking at least 1-2 years.

Mixed Growth in Non-cement Segment

The non-cement segment contributed 27% of the companys revenue in 2010.While we see more potential in the lightweight building material and engineeringservice segments, we remain cautious on CNBMs aggressive expansion of rotor

blade production amid the oversupply.

Key Risks to Rating

Lower earnings visibility than other pure cement plays.

High gearing of 182% and thus earnings erosion could be significant under arising interest rate environment.

Valuation

The stock is trading at an attractive valuation. We set our target price at HK$17.30,based on a sum-of-parts methodology. We value each cement business unit bythe target EV/tonne and other non-cement segments by target P/E multiples asshown in Figure 1. We initiate coverage on CNBM with a BUYcall.


China: Industrials

Michelle Leung(852) 3988 [email protected]

Investment Summary12-09 12-10 12-11E 12-12E 12-13E

Total turnover (RMB m) 33,297 51,988 80,810 99,779 111,199

Revenue growth 26.3% 56.1% 55.4% 23.5% 11.4%

Net profit (RMB m) 3,663 3,068 6,349 8,229 9,405

Fully diluted EPS (RMB) 1.56 0.78 1.18 1.52 1.74

FD P/E (x) 7.82 15.69 10.39 8.02 7.02

FDEPS growth 28.1% (50.2%) 51.0% 29.6% 14.3%

Previous EPS (RMB) NA NA NA NA NA

Consensus EPS (RMB) 1.22 1.49 1.82

EPS vs Consensus (3.46%) 2.02% (4.29%)

Recurrent CPS (RMB) 1.70 1.11 1.72 2.97 3.09

P/CF (x) 7.20 11.04 7.09 4.11 3.96

EV/EBITDA (x) 8.84 13.30 7.89 6.51 5.76Dividend/share (RMB) 0.109 0.085 0.175 0.227 0.260

Dividend yield 0.89% 0.69% 1.43% 1.86% 2.12%

ROE 33.7% 19.2% 27.5% 26.8% 24.6% Source: Company data, Bloomberg data, BOCI Research estimates. Closing prices are as of 24 May 2011.


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CNBM Price: HK$14.58BUY Target Price: HK$17.30Michelle Leung 25 May 2011


VALUATION AND RECOMMENDATION

Worries over an economic slowdown have triggered some profit-taking on CNBM,whose share price came down by 15% within a month. The company is tradingat only 10x 2011 P/E, compared to its mid-cycle valuation of 12x. We think its

valuation has become attractive again.

As per our discussion with management, the companys sales momentum andprofitability remain strong. Looking ahead, its cement b

cement - china

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