Conclusion: We are raising our industry view to
Attractive as we believe the restructuring theme is
re-emerging. In our long-term supply & demand model
(out to 2020), despite our forecast for a slowdown in
demand from 2011, the recent policy should help curb
the NSP capacity expansion and speed up vertical kilns
closure. We have re-built our bull case based on this
scenario, which reflects: 1) industry utilization to improve
to above 90% from 2011 and onwards; 2) the national
average cement price to rise to US$60/ton in 2015 from
~US$50/ton currently; 3) industry average net income
per ton to almost double from ~US$4/ton currently to
~US$8/ton by 2015; and 4) SE and East China to benefit
the most from the restructuring. Our new PTs are the
simple average of our bull & base cases, with base case
earnings unchanged.
Supply restructuring defying demand slowdown:
Per recent announcements by MIIT and State Council,
we forecast total capacity growth to moderate from
14-15% in 2009-10 to flat in 2011, as a faster vertical kiln
closure of ~100mn tons should roughly offset the NSP
capacity increase. Despite our forecast for demand
slowdown (from 14-15% in 2009-10 to 8% in 2011), flat
capacity growth should lift utilization to >90% (vs.
historical 85%), leading to higher pricing and profitability.
Our forecast of NI/ton of ~US$8 is still below India’s
>US$10 and Indonesia’s $15-20 (methodology inside).
CNBM and Shanshui are our top picks, due to their
greatest upside potential and biggest margin expansion.
Our new PT of HK$24.5 for CNBM implies a base case
2010e P/E of 16.8x, roughly in-line with Conch’s current
P/E. Our new PT of HK$7.8 for Shanshui implies 15x
2010e P/E, still below peers.
For regional cement comparison, please see
“Secular Demand Growth in India & Indonesia;
Supply Restructuring in China” published today.