Asia China
Resources Metals & Mining
21 January 2009
Chinese Cement Sector
The only place to be in 2009;
Buy CNBM
Julian Zhu
Research Analyst
(852) 2203 6207
julian.zhu@db.com
J Clarke
Research Analyst
(852) 2203 6371
j.clarke@db.com
Cement demand to recover ahead of overall economy
The massive acceleration of loan growth in December and the swift
implementation of the government-led projects increasingly convince us that
cement is highly likely to see an earlier-than-expected demand recovery. Following
higher cement prices/lower coal price assumptions in FY09/10, we have
significantly raised our earnings/TPs for both CNBM and Conch Cement. We
reiterate Buy on CNBM due to attractive valuations and maintain Sell on Conch on
expensive valuations.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. 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. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
China Building Materials (3323.HK),HKD8.55 Buy
Anhui Conch Cement (0914.HK),HKD36.00 Sell
Loan growth vs. cement prices
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
250
270
290
310
330
350
370
390
Monthly loan growth Cement prices
% RMB/tonne
Global Markets Research Company
Cement: the best play on government projects-led recovery
With much higher leverage than metals/steel to infrastructure construction,
cement is set to be the first and the most direct beneficiary of the ongoing
infrastructure-related government spending. Even if we assume no near-term
growth recovery, we still expect cement to fare better as the government will
likely spend more to revive economic growth.
Accelerating loan growth suggests strong cement demand
DB’s China banks analysts see upside to FY09 loan growth and believe 1Q09 loan
growth could be even higher when the massive infrastructure projects
construction starts. The strong loan growth means many construction projects will
likely start ahead of schedule, suggesting an earlier-than-expected cement
demand recovery.
Higher earnings/TPs on higher cement prices/lower coal price assumptions
Following new cement price assumptions (5% decline in FY09 and flat in FY10)
and new coal price forecasts (30% decline in FY09 and 5% decline in FY10), we
have raised our FY09/10 earnings estimates for CNBM by 24% and 122% (also on
24% higher cement sales), respectively, and for Conch Cement by 27% and 68%,
respectively. Our new target price for CNBM is HK$12.40 and for Conch Cement
HK$23.0.
CNBM remains our top pick
Despite the 400% rebound from its low in October 2008, we still see attractive
value in CNBM. Trading at 6.7x and 4.3x FY09/10 PER, CNBM now is valued at a
69% discount to Conch Cement. With much stronger earnings growth in FY09/10,
we expect CNBM to continue to outperform Conch Cement.
Residual income model-based target prices; ASPs/coal prices are risks
We use a residual income model to derive TPs for Chinese cement stocks. We are
using a cycle-average book value and ROE to capture through-the-cycle earnings
growth. In order to be conservative, we assume zero terminal growth after 2011.
The key earnings drivers are the sale prices of cement/clinker products and their
production costs. Any substantial changes to either ASPs or production costs
would significantly change our earnings estimates and valuations on the stocks.
See detailed valuations and risks in the individual company pages in this report.

Table of Contents
Cement: leading the recovery .......................................................... 3
Cement to lead a government spending-driven recovery .........................................................3
Cement price still up 10% in FY08............................................................................................4
Watching loan growth....................................................................... 5
Monthly loan growth leading cement prices.............................................................................5
FY09 loan growth likely to surprise on the upside ....................................................................5
Falling coal prices .............................................................................. 7
Falling coal prices help offset weaker cement prices ...............................................................7
Higher earnings/target prices .......................................................... 8
Significant earnings upgrade on higher cement ASPs & lower coal price assumptions ...........8
Earnings sensitivities to cement/coal prices .............................................................................8
Implied intrinsic value based on global comps .........................................................................9
We still prefer CNBM....................................................................... 10
Different markets, diverging performances ............................................................................10
Conch Cement still trading at rich valuations ..........................................................................10
Relative performances ............................................................................................................11
Regional cement prices................................................................... 13
FY08 regional cement prices – 42.5 grade..............................................................................13
China Building Materials................................................................. 16
Higher earnings/TP; Buy ................................................................. 18
Higher cement prices/lower coal price assumptions ..............................................................18
Higher earnings & target prices ..............................................................................................18
Sensitivities............................................................................................................................19
We prefer CNBM to Conch Cement .......................................................................................19
Key assumptions....................................................................................................................21
Anhui Conch Cement ...................................................................... 24
Higher earnings/TP; still Sell .......................................................... 26
Higher cement prices/lower coal price assumptions ..............................................................26
Higher earnings & target prices ..............................................................................................26
Sensitivities............................................................................................................................27
We prefer CNBM to Conch Cement .......................................................................................27
Key assumptions....................................................................................................................29