Rebound visible, turnaround uncertain
Industry should rebound in 2H09, but may not turnaround
We believe the government’s fiscal stimulus package would be positive
to cement demand in 2009, but property investment remains the key to
the cement industry’s turnaround because the industry has been more
dependent on the property sector for cement demand from 1998. Our
scenario analysis shows that cement demand growth rate in 2009
should range at 3.5-7.5%, which means the industry utilisation rate will
decline on our base-case scenario with a 35% demand increase from
infrastructure, and a 10% and 5% decline of cement demand from
property and other sectors.
Market divergence will enlarge in 2009
The market divergence will enlarge in 2009 given the imbalance of
demand growth, new capacity addition and old capacity closure for
different markets. We suggest investors pay more attention to two types
of markets: 1) those with higher demand growth, such as northwest and
southwest markets; and 2) those with larger volume of old capacity
closure, such as Hebei, Shandong and Guangdong.
Strong NSP capacity addition in 2009
We expect 170m tonnes of New Suspension Preheater (NSP) capacity
to be added in 2009, the highest level ever. New capacity addition in
2010 will not decline too much based on stronger balance sheet of listed
cement companies. We expect the government will continue to push the
closure of old capacity, while the risk to our estimate of 60m tonnes per
year is on the downside because of unemployment and compensation
concerns faced by the local government.
Stock prices stretched on positive news
We believe the market overreacted to the government’s stimulus
package and we remain NEGATIVE view on the sector and maintain
REDUCE on ACC and CNBM, and HOLD on ACCH with TP of
HKD20.00, HKD6.80 and HKD3.25, based on 10x, 9x 2009E and 8x
2010E P/E. We also initiate coverage on Sinoma with a REDUCE rating
and TP of HKD3.70 on our SoTP valuation.

Contents
A historical review: V- or U-shape adjustment?............................................................. 3
Chinese cement industry in the past 20 years 3
Will adjustment be similar to 2004-05 or 1996-00? 5
Increasing dependence on property investment 6
Positive in the mid term, cautious in the long term 6
Market divergence to expand in 2009............................................................................ 8
Demand outlook in different markets 8
Supply outlook in different markets 9
Two cases: Northwest China in 1998, Henan in 2004-05 10
How did cement companies perform in 1996-00? 11
Markets selection 12
Property FAI decline vs infrastructure boosting ........................................................... 13
Real demand growth rate has been cold 13
A review of cement demand growth in 1998 14
Demand from property is still the key 15
How about infrastructure investment growth? 17
Cement demand outside property and infrastructure does not look positive 18
Scenario analysis 18
Capacity addition in 2009; uncertainties in 2010 ......................................................... 20
Strong capacity addition in 2009 20
Uncertainties in 2010 21
Old capacity closure should go as scheduled, risk is on the downside 22
Utilisation ratio hard to improve in 2009 ...................................................................... 24
Utilisation ratio to decline in 2009 under base case 24
2H09 demand rebound expected; turnaround is tenuous 25
Scenario analysis: need 7.5% of demand growth rate to maintain 2008 utilisation ratio 26
Cost pressure gone, but it is hard to benefit from a coal price decline ........................ 27
Coal price to decline in 2009, but cement producers’ benefit will be limited 27
Valuation stretched on positive news .......................................................................... 28
Valuation methods discussion 28
Valuation of Anhui Conch Cement in 1996-08 28
Sensitivity analysis 29
Historical valuation review of global peers 30
We use P/E to value cement companies 31
Market overreacted to the infrastructure investment boost 31
Appendices .................................................................................................................. 33
1. Devil’s advocate: Risks to our investment case 33
2. Cement companies comparison 34
3. Cement price in different regions 36
Company updates........................................................................................................ 39
Anhui Conch Cement 40
China National Building Materials 43
China National Materials 46
Asia Cement (China) 49

A historical review: V- or U-shape adjustment?
The Chinese cement industry cycle is dominated by the demand change or
supply change. Demand-driven industry adjustment usually takes longer than
supply-driven industry adjustment, according to the industry development seen
in the past 20 years. We expect the upcoming industry adjustment is more likely
to be a U-shape adjustment given the expected deeper and longer economic
downturn. The property sector is playing a more important role in terms of
cement demand than 10 years ago and cement demand from the property
industry will largely determine how long the industry adjustment will last. We are
still positive about mid-term cement demand growth. With the high investment
ratio of China, there would be pressure on long-term demand growth for the
Chinese cement industry.
Chinese cement industry in the past 20 years
The cement demand is closely correlated to GDP growth and especially to fixed asset
investment (FAI) growth. We can divide the Chinese cement industry between 1990
and now into five stages, based on the industry profit margin performance. We find
from demand-driven and supply-driven cycles, the demand growth determines the
longer-term industry trend, while the supply issue can cause short-term industry
adjustment. In the meantime, we find similar industry development orbit from the
Chinese steel industry with the Chinese cement industry, as showed in Exhibit 2.
􀂃 1990-93: The economy recovered from 1989 and reached its peak in 1993. With
the property market boom and deregulation of cement price in 1993 (steel price
was also deregulated in 1993), the industry profit margin reached peak level in
1990-07 at 13%. Per tonne of profit before tax also reached RMB30/tonne, highest
in 1990-07. The peak margin in 1993 was caused by the deregulation of cement
prices and the simultaneous strong demand from property development, so it’s not
a good indicator of future margin performance.
􀂃 1994-00: Rate of cement demand started to decline as the government began to
cool down the overheated economy. It decreased to 3.3% y-y in 1996 from 14.5%
y-y in 1994, and maintained a low CAGR of 4.7% between 1996 and 2000. The
low demand growth rate in 1996-00 was largely due to slowing FAI and the
economy coupled with the Southeast Asian financial crisis in 1998. Meanwhile, the
industry recorded its worst financial performance since 1990 with the whole
industry in the red in 1996-00. The Chinese cement industry in 1996-00 shows a
typical demand-driven downturn.
􀂃 2001-2Q04: The FAI growth led the economy to recover from 2001. As a result,
cement production volume increased 10.7% in 2001 and 9.7% in 2002, from 4.2%
in 2000. Meanwhile, with the economic recovery rolling in from 2002, cement
demand continued to climb y-y and reached 18.9% in 2003. Coupled with the
demand recovery, profit margin of the industry also increased and reached 6.2%,
the highest during this period.
􀂃 3Q04-2Q05: This cycle reflects a typical supply-driven downturn. With the industry
recovery, cement producers expanded capacity aggressively with industry FAI
growth of 40% in 2002, 101% in 2003 and 35% in 2004. Meanwhile, the
government took severe administrative measures to control overheated FAI
growth from mid-2004. The cement demand growth rate accordingly declined by
nearly 5%. Oversupply emerged after aggressive capacity addition in 2004 and
2005, which led the market to collapse from 3Q04.