We argue fiscal stimulus programme
will increase 2008-10e cement demand
CAGR to 9.9% from 6.9%
􀀗 Earnings supported by lower energy
prices, falling interest rates
􀀗 We initiate on two cement stocks and
pick Anhui Conch and Taiwan Cement
as best plays on China cement industry
Support factors
We argue that the following three factors will support the
cement stocks under our coverage:
􀀗 Fiscal support for cement demand. Our analysis
shows that the RMB4trn fiscal stimulus will increase
2008-10e cement demand CAGR from 6.9% to 9.9%.
Meanwhile, production is set to increase at a CAGR of
5.3% in the same period
􀀗 Falling energy costs, interest rates. Earnings are
further supported by falling energy costs (coal cost is
>50% of sales) and lower interest rates
􀀗 Low cement stock valuations. 2009e PBs for Chinese
cement plays are at 2.2x for Anhui Conch and 2.0x for
CNBM. These levels are just off the lows of Oct 08 and
comparable to valuations seen in 1H06
We also (1) discuss how fiscal stimulus leads to additional
demand, (2) provide earnings sensitivities, and (3) conduct a
regional analysis of Chinese cement prices.
􀀗 We initiate with an Overweight (V) on Anhui Conch and
a Neutral (V) on CNBM; we reiterate our Overweight
(V) on Taiwan Cement and our Neutral (V) on Asia
Cement
Risks: Coal price volatility, slowing market consolidation

Investment summary
􀀗 China’s cement demand is supported by fiscal programmes, and
its earnings are supported by falling coal costs and interest rates
􀀗 Potential catalysts coming through: interest rate and power tariff
cuts, further fall in coal costs, and pump-priming package
􀀗 We initiate with OW(V) on Anhui Conch, Neutral (V) on CNBM;
reiterate OW(V) on Taiwan Cement, Neutral (V) on Asia Cement

Demand growth
We expect China’s cement sector to stage
sustainable outperformance in the next 12 months.
Our optimism is based on the following:
􀀗 Cement demand in China is core to Fixed
Asset Investment (FAI) and that, in turn, is an
integral part of Beijing’s mammoth RMB4trn
pump-priming fiscal package. This gives
great visibility to the sector’s growth
prospects
􀀗 We estimate the pump-priming will lift the
cement demand CAGR from 6.9% (our
forecast without stimulus measures) to 9.9%
over 2008-10e
􀀗 Our earnings and margin growth forecasts are
underpinned by at least three major catalysts
in the next three to four months:

1. Falling energy costs (coal and electricity
account for 50%+ of sales) mean major
cost savings, expanding gross margin.
Between Aug and December 2008,
China’s coal price (Qinhuangdao coal
price) plunged 48%
2. Sizeable interest rate cuts in the next
three months translate into savings for
highly geared cement companies
3. The pump-priming by Beijing could
expand further in the next six months as
concerns about GDP growth increase
We think these potential catalysts are only
partially priced in.

目录

Investment summary 3
Valuation, target price and
peer comparison 11
Earnings sensitivity 18
Peer comparison 20
Cement price outlook 25
China’s cement market 29
Funding decisions 33
Consensus changes 35
Risks 36
Company profiles 39
Anhui Conch (914) 41
China National Building Material (3323) 55
Taiwan Cement (1101) 69
Asia Cement (1102) 75
Disclosure appendix 81
Disclaimer 85

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