China Cement：Trip takeaways–shaky demand but positive attitude of Conch is key

Deutsche Bank Markets Research Asia Hong Kong Resources Metals & Mining Industry China Cement Date 5 May 2014 Forecast Change Trip takeaways – shaky demand but positive attitude of Conch is key South and East China cement trip – caution for 2Q but Buy on weakness ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Johnson Wan Research Analyst (+852) 2203 6163 johnson.wan@db.com James Kan Research Analyst (+852) 2203 6146james.kan@db.com Key Changes Company Target Price Rating1101.TW 54.00 to 52.77(TWD) -1893.HK 1.91 to 1.66(HKD) -1102.TW 35.97 to 39.59(TWD) -Source: Deutsche Bank Top picks Anhui Conch Cement (0914.HK),HKD29.25 BuyCR Cement (1313.HK),HKD5.38 BuySource: Deutsche Bank Sinoma (DBe vs Cons) DBe Cons% diffFY14E 0.15 0.17-13%FY15E 0.18 0.20-8%FY16E 0.22 0.213%Source: Deutsche Bank, Bloomberg Finance LPTCC (DBe vs Cons) (TWD) DBe Cons%diffFY14E 3.52 3.287%FY15E 4.27 3.5321%FY16E 4.93 3.6137%Source: Deutsche Bank, Bloomberg Finance LPACC(DBe vs Cons) (TWD) DBe Cons%diffFY14E 2.64 2.62%FY15E 3.18 2.958%FY16E 3.65 3.2114%Source: Deutsche Bank, Bloomberg Finance LPEarning changes FY14E New Old%chgSinoma (RMB) 0.15 0.17-11%TCC (TWD) 3.52 3.86-9%ACC (TWD) 2.64 2.573%Source: Deutsche Bank Related recent research DateSweet spot in the super cycle Johnson Wan 19 Feb 2014Source: Deutsche Bank This report changes price targets, and estimates for several companies under coverage (seetables above).Many investors have grown concerned with the slow start to 2Q this year, particularly in East China due to weak commodity housing starts and poor weather. As a result, inventories have risen and near-term price hikes could prove challenging. However, infrastructure-led demand in South China has been extremely resilient, driving price hikes even in the slow season. Given the high expectations of 2Q price hikes and the weak macro picture of late, sentiment for cement names has dampened. However, we believe the solid fundamentals of the sector remain intact and the 2H14 pricing outlook will improve. Buy on correction. Have prices peaked in 2014? Unlikely; we expect more price hikes in 2H14 We believe lower priced regions such as GX and Hunan will continue to see price hikes in 2Q while higher priced regions such as Zhejiang will see prices maintained through production halts. For 2H14, we are constructive on demand and pricing as 1) there are signs property is now loosening through administrative measures; 2) government continues to boost infrastructure spending, i.e. railways, and projects announced have yet to start; 3) seasonally, 4Q weather is better leading to more construction starts; 4) construction activity in Nanjing is being pushed back until after Youth Olympics in August; 5) the strong mindset of producers to keep pricing high has never been firmer. Weakness in commodity residential housing has much less impact on cement Given the high inventory levels of homes, new starts and those under construction have slowed. Price cuts to boost sales are now seen across the nation, hurting margins for developers and prompting buyers to take a wait-and-see approach. However, the impact on cement is less than perceived as commodity residential housing only accounts for c.10-15% of total cement demand, though slower sales may have broader implications on the economy. What is interesting is that mortgage lending by