Government policy addresses supply risk. With new cement capacity
under construction reaching nearly 50% of market size in China, the central
government recently issued several emergency policies and measures to
curb supply growth. The impact of the policies on 2010E’s outlook remains
limited, in our view, yet would be notably positive for 2011-12E, in particular
easing any potential downturn when demand deflates.
■ We remain selective for 2010E. On a one-year view, we see a continued
improvement in the northeast and central-south regions, a balanced market
for central-north and eastern China, and rising supply pressure for the
southwest and northwest regions.
■ Top picks based on regional exposures. Our top pick is Shanshui with
our revised target price being HK$8 – we view Shanshui as the most
undervalued Chinese cement stock, in a region with a sustained supply
driven improvement. We remain positive on TCCI, a high beta play on the
recovery of the southern China market. We downgrade Conch and CNBM
to a NEUTRAL, with target prices of HK$60 and HK$19, respectively, due to
the balanced market outlook of the Yangtze delta region and limited upside
in near-term cement prices versus expectations. We would be buyers of
Conch at HK$47 and CNBM at HK$12, when the implied cement price
floors at 1H09 levels.