China Cement Sector
Near-term catalysts vs. mid-term pressure
􀂄 We update our supply and demand model
We update our cement industry supply and demand model to factor in the major
macroeconomic changes that have taken place in China. We estimate the cement
demand growth rate to rebound from 2.2% in 2008 to 5.8% in 2009, and to 7.7% in
2010. Meanwhile, supply expansion remains aggressive. Taking the closure of old
capacity into consideration, we estimate net capacity additions in 2009 and 2010 at
3.6% and 5.1%, respectively. Capacity addition in 2008 was 9.6%.
􀂄 We expect more positive catalysts
We retain our positive view on the cement sector, based on potential positive
catalysts including a recovery in demand and prices, higher infrastructure
investment to come on line, strong loan growth, and government stimulus
measures for cement downstream industries.
􀂄 Oversupply is a mid-term overhang
However, oversupply will be an overhang for the industry in 2010, especially in
the eastern China market. Anhui Conch should add over 20m tonnes of new
capacity in eastern China and may trigger a price war in that region. We suggest
caution should valuations of the cement stocks soar.
􀂄 Valuation: new valuation methodology introduced
We now explicitly forecast long-term drivers with UBS’s VCAM tool, and we
upgrade the ratings and price targets of cement stocks under our coverage. Our
preferred pick remains Huaxin Cement, which we believe will record solid growth
in 2009 with a relatively inexpensive valuation.

Contents page
Industry analysis 3
— Demand set to recover.........................................................................................3
— Supply growth looks aggressive as well ...............................................................5
Earnings updates 7
Valuation 12
— New valuation methodology ...............................................................................12
— VCAM assumptions............................................................................................13
— Cross-check using PE valuations .......................................................................16
— Positive catalysts for the cement sector:.............................................................19
— Stock picks.........................................................................................................20
— Valuation comps ................................................................................................22
Valuation bands 23
Company pages 33
— Anhui Conch Cement .........................................................................................34
— China National Building Materials.......................................................................39
— Anhui Conch Cement - A....................................................................................44
— Huaxin Cement - A.............................................................................................47
— Tangshan Jidong Cement ..................................................................................52