Page 1 www.dbsvickers.com ed-JS / sa- AL Prefer profit leaders • Weaker cement prices in 2Q-to-date are partly offset by a strong 1Q; we believe profit leaders Anhui Conch and CR Cement will report decent 1H results • FY14 cement demand growth edged down to 5.7% from 6.0% previously to reflect the cut in growth expectations in the property segment; we expect a better 2H based on likely more pro-growth policies • Top pick is Anhui Conch - accumulate on 3Q weakness; downgrade CNBM to FULLY VALUED from HOLD on more S-T and L-T pressure Weak 2Q partly offset by strong 1Q. National cement prices had declined by just 1% q-o-q in the seasonally weak 1Q, supported by resilient cement prices in the East (flattish) and South (+4.5%). On the contrary, in the seasonally strong 2Q, Apr-to-date cement prices have fallen by 2% q-o-q, dragged down by price declines in the East (-6%) and South (-4%). A number of factors were behind the price weakness: i) Weak property demand and slower than expected infrastructure demand, ii) Elevated inventory level in Apr-May due to more rainy days y-o-y. Despite weaker cement prices in 2Q, we believe profit leaders Anhui Conch and CR Cement will register decent 1H14 earnings growth. Growth rates for cement demand for 2014 edged down to 5.7% from 6.0%. We are projecting there will be no growth in cement demand from property in 2014, from 2% growth previously. Offsetting property weakness is demand from infrastructure and urbanisation construction. We are projecting a robust 8% increase in cement consumption for infrastructure and urbanisation construction. We forecast cement output to rise 4.2% y-o-y in 1H14, followed by a 6.9% increase in 2H14 on likely more pro-growth policies in 2H. We see Beijing begins fine-tuning policies to stablise economic growth recently through PBOC’s targeted RRR cut on related banks. Top pick: Anhui Conch, least preferred CNBM. We have revised down FY14/15F earnings by 3%-28% for cement stocks in our coverage, to factor in more conservative price forecasts for the seasonally weaker 3Q and cut our TPs correspondingly. We downgrade CNBM to FULLY VALUED from HOLD as we flag concerns over deteriorating working capital of concrete as property AP days rise. In the L-T, we think the company’s earnings could be pressured by potential asset write-downs as the cement industry consolidates through closures of inefficient production lines. We downgrade Shanshui to HOLD from BUY as stagnant 2Q cement price in Shandong in 2Q lead us to cut earnings estimates. HSI: 23,319 ANALYST Addison DAI +852 2971 1931 addison_dai@hk.dbsvickers.com Recommendation & valuation CompanyPriceTarget PriceUpsideRatingFY14F PEFY14/15F earnings vsHK$HK$%xconsensusAnhui Conch Cement (914 HK)27.3533.7023Buy10.2-6% / -2%CR Cement (1313 HK)4.877.0044Buy7.60% / -1%CNBM (3323 HK)7.045.70(19)Fully Valued4.8-7% / 7%China Shanshui (691 HK)2.852.80(2)Hold 6.9-15% / -13%West China Cement (2233 HK)0.770.67(13)Hold 9.2-30% / -34% Source: Thomson Reuters, DBS Vickers Based on closing prices as at 13 Jun 2014 China: Anhui Conch (914.HK) vs Hang Seng Index, its PE discount to HSI close to 1S.D below historical average is a key buy signal -80%-40%0%40%80%120%Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13Jul-13Oct-13Jan-14Apr-14 +1SD: 42%Avg: 11%-1SD: -20%Source: Thomson Reuters, DBS Vickers DBS Group Research . Equity 16 June 2014 China / Hong Kong Industry Focus China Cement Sector Refer to important disclosures at the end of this report Industry Focus China Cement Sector Page 2 Table of Contents Cement listco case scenario: earnings and valuation sensitivity to change in cement unit GP 3 Cement listco snapshot of operational assumptions, earnings forecasts and valuation 4 1H14 cement price recap and 2H14 outlook 6 Anhui Conch operational assumptions: 8 Map: Regional cement prices 10 China cement demand 11 China cement supply 15 China cement sector valuation 17 Stock Profiles 24 Anhui Conch Cement (914 HK) 24 China Resources Cement (1313 HK) 26 China National Building Materials (3323 HK) 28 China Shanshui (691 HK) 30 West China Cement (2233 HK) 32 Appendix: 2014 YTD cement selling prices and clinker capacity utilisation rates by region 34 Industry FocusChina Cement Sector Page 3 Cement listco case scenario: earnings and valuation sensitivity to change in cement unit GP Case scenario: Earnings and valuation sensitivity to change in cement GP/t Anhui Conch (914 HK)CNBM (3323 HK)2014F sensitivity Net profit (Rmb mn)EPSP/EP/BROE2014F sensitivity Net profit (Rmb mn)EPSP/EP/BROECurrent share price: HK$27.35Current share price: HK$7.04DBSV Base case: Unit GP at Rmb84/t11,339 2.14010.31.718%DBSV Base case: Unit GP of Rmb66/t6,294 1.1664.80.716%Unit GP up by Rmb1013,022 2.4578.91.720%Unit GP up by Rmb107,825 1.4493