CEMENT:New policies favour leading producers

陈朝霞

CEMENT:New policies favour leading producers

来自：MACD论坛(bbs.shudaoyoufang.com) 作者：陈朝霞 浏览：3277 回复：0

The government has issued a series of new policies forthe cement industry, including new emission standards, delegation of new capacity approval rights and elimination of low-grade cement. We think these policies will likely support the closureof inefficient capacityandhence is a positive for the leading producers in the long run. Thus,we reiterateour Overweight sector rating,with Anhui Conch and CR Cement as our top picks. We believe the low inventory levels willlead to smaller price cutsinthe1Q13 low season. The subsequent upside risk in earnings should serve as a catalystin the medium term. What Happened :The Chinese government issued a series of new policies over the last few weeks. These policies include tighter-than-expected emission control standards and delegation of capacity expansion approval rights. The government also proposed to eliminate low grade (P.C. 32.5) cement. These policies triggered concerns of lower margins and potential capacity risks among investors. What We Think :We think these worries are overstated, as we believe the policies are supportive of the leading producers. New emission standards: While the additional capex on the installation of new equipment could be material to the small production lines, it is immaterial for the large producers. The running costs of Rmb3-5/t could also be passed through easily. Companies with the stage combustion equipment installed (e.g. Anhui Conch), could also enjoy comparative cost advantage in the long run as it could lower the overall processing costs, especially when ammonia price rises. Capacity control: The delegation of approval rights is just a change of controlling point, from the NDRC to the provincial governments. The strict control over new cement projects should remain intact, until the problem of excess capacity is fully resolved. However, in the longer term, there could be mild capacity risk in the less-developed western areas when approval resumes. Elimination of low-grade cement: With the use of high-grade cement to replace low-grade cement, demand for clinker should increase. Although the loss of VAT rebate is a negative for producers (e.g. CNBM) pending the launch of a potential rebate for high-grade cement, this policy could support the closure of small inefficient producers as they would lose their cost advantage from the artificially-low clinker ratio in low-grade cement production. Therefore, we reiterate our positive view on the cement sector, and expect the improving supply and demand condition to support better prices in 2014. What You Should Do :Cement stocks have corrected 13-18% from the peak in Dec 13. Although we see limited catalysts in the near term, we believe the existing low inventory levels and strong cement prices carried forward from Dec 13 should lead to upside risks in FY14 earnings. Our top picks remain Anhui Conch and CR Cement, which now trade at 10.5x and 8.8x FY14 P/E ,respectively, implying a 16-24% discount to their historical averages. We view such valuation as attractive and advise investors to accumulate on weakness in the coming weeks.