China Cement ： Start the Year of the Horse with multiyear double-digit earnings growth

abcGlobal Research  We forecast the earnings of the China cement sector to grow at a 2013-15e CAGR of 35%  We upgrade our earnings and valuations, factoring in stronger ASP growth trends  Our top pick in the sector remains CR Cement (1313 HK); we upgrade Conch (914 HK) to OW from UW and Shanshui (691 HK) to N(V) from UW(V) Further to our report: Greater China Cement – The strong get stronger while the weak..., dated 23 January 2014, we have derived supply, demand and ASP trend forecasts at the provincial level. Although our macro outlook remains unchanged, this detailed breakdown has allowed us to forecast ASP price trends for each company based on its regional exposure. We forecast ASP growth of 10% for 2014 and 5% for 2015. After applying our newly derived regional forecasts to the companies under our coverage, we have increased our ASP growth assumptions by an average of 5% each for 2014 and 2015. Profitability to be boosted further by lower costs. Although higher environmental standards have added to costs, we believe the combination of higher ASPs and structurally lower coal costs will drive an accelerated improvement in industry profitability. We forecast GP/tonne to increase 59% from 2012 levels by 2015. 35% earnings CAGR in the next two years; our estimates are 38% above consensus for 2014e and 60% for 2015e. The above-mentioned factors lead to increases of 27% and 63% in our 2014 and 2015 earnings estimates, respectively. As a result of the above changes, we raise our valuations and target prices for the companies under our coverage. We continue to value the stocks using an EV/IC methodology. Our top pick in the sector is still CR Cement (1313 HK). We upgrade Conch (914 HK) to OW from UW and Shanshui (691 HK) to N(V) from UW(V). Downside risks: A slowdown in demand resulting in weaker-than-forecast supply/demand dynamics. Industrials China Construction Materials China CementStart the Year of the Horse with multi-year double-digit earnings growth HSBC rating and target price summary Ticker Target price (old) (HKD) Rating (Old) Close price Pot. ret.* Mkt cap (USDm) Daily T/O (USDm)CR Cement 1313 HK 11.00 (8.40) OW 5.31 109% 4,273 8.90CNBM 3323 HK 12.40 (9.30) OW 7.50 69% 4,213 36.21ACC China 743 HK 7.70 (6.40) OW 4.98 58% 769 0.43Conch 914 HK 35.00 (25.0) OW (UW) 30.10 18% 4,729 42.83Shanshui 691 HK 2.90 (2.60) N(V) (UW(V)) 2.56 19% 2,060 7.01* Potential return equal the percentage difference between the current share price and the target price, plus the forecast dividend yield Prices as of 30 January 2014; Ratings: OW – Overweight, UW – Underweight, V – Volatile, NA – Not Applicable Source: Bloomberg, Thomson Reuters Datastream, HSBC estimates 4 February 2014 Wei Sim* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6602 weisim@hsbc.com.hk Alex Zhao* Associate View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 Industrials China Construction Materials 4 February 2014 abcIn our last report, we analysed the new, stricter environmental policies and forecast their impact on supply/demand dynamics in the China cement sector from a top-down perspective. In this report, we take our analysis a step further, forecasting the supply/demand outlook for each province, and updating our 2014e and 2015e ASP assumptions for the China cement companies accordingly. Our revised forecasts suggest multi-year double-digit earnings growth for the sector. Sector earnings to grow at a 35% CAGR in 2013-15e Our revised forecasts suggest a 2013-15e earnings CAGR of 35% for the companies under our coverage: Chinese cement 2013-15e: two-year earnings CAGR of 35% ACC China 39.9% CNBM 38.8% Conch 33.3% CR Cement 31.6% Shanshui 26.5% Sector 34.8% Source: HSBC estimates Consensus far too conservative Our revised