January 28, 2011 This report has been prepared by Samsung Securities (Asia) Limited. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 135  SECTOR SPOTLIGHT Looking for closure Plans to close vertical kilns and restrict new capacity growth suggest significantly higher cement prices. Figure 1: Excess capacity in the cement sector Source: China Cement Association, Samsung Securities We initiate coverage of six stocks in the China cement sector with BUYs on Anhui Conch, China National Building Materials, China Resources Cement, China National Materials (Sinoma) and West China Cement, and with a HOLD rating on China Shanshui Cement. Our thesis is simple: The government plans to close some 470m tpa of inefficient vertical kiln capacity and to restrict the construction of new cement plants. As a result, we expect the cement market to shift from a capacity surplus of ~180m tpa now to a shortfall by end-2012e. This should result in substantially higher cement prices—witness the 11-44% price rises in some regions in 4Q10 driven by power shortages—and, ultimately, share prices. We view the current seasonal weakness as a great buying opportunity. Our TOP PICKS are West China Cement, CR Cement, and Sinoma. SECTOR OVERVIEW Price Target Price % P/E(x) FY1 Rating Anhui Conch Cement (914 HK) HK$36.75 HK$41.20 +12% 19.5 CNBM (3323 HK) HK$19.46 HK$22 +13% 12.6 China National Materials (Sinoma) (1893 HK) HK$6.83 HK$9.80 +43% 15.3 China Resources Cement Holdings (1313 HK) HK$5.93 HK$7.80 +32% 20.8 China Shanshui Cement Group (691 HK) HK$6.05 HK$6.50 +7% 14.3 West China Cement (2233 HK) HK$2.74 HK$3.70 +35% 9.2 Source: Company data, Samsung Securities estimates -200-100010020030020092010e2011e2012e2013e(tonnesm)Capacity surplusCapacity shortfallin 2012eChina Cement Sector Kevin You kevin.you@samsungfn.com +852 3411 3751 Simon Francis simon.francis@samsungfn.com +852 3411 3713 Chris Chen chris.chen@samsungfn.com +852 3411 3750  SAMSUNG vs THE STREET Prepare for the long term  Investors are more concerned about short-term demand drivers such as affordable housing, which we think is not the key to the story.  Since the government is determined to control oversupply issues, we expect the policies will turn the market to capacity shortfall by end-2012e.  As a result, cement price should rise substantially, and ultimately, lead to much better earnings.  This is similar to what we experienced in the eastern market during the power restriction period in 4Q10, when producers almost doubled their margins.  We advise investors to buy on seasonal weakness, so as to prepare for the upcoming bull market. January 28, 2011 January 28, 2011 China Cement Sector 2 Figure 2: Industry snapshot Note: capacity exposure to the region is in parentheses. Source: Samsung Securities, Company data China Cement Sector  INDEX 1. Recommendations and valuations p6 2. Demand-supply balance p13 3. Supply p15 4. Demand p20 5. 12th Five-Year Plan p27 6. Price outlook p29 7. Production costs p33 COMPANY SECTIONS Anhui Conch Cement (914 HK) p35 CNBM (3323 HK) p50 China National Materials (Sinoma) (1893 HK) p66 China Resources Cement Holdings (1313 HK) p85 China Shanshui Cement Group (691 HK) p102 West China Cement (2233 HK) p118  AT A GLANCE Sector Overview Strong supply-side regulation should move the market to supply shortfall in 2012, leading to higher cement prices. Key Players The industry is highly fragmented, with over 5,000 producers. The top 10 producers share about 26% of the market. Maturity Despite the government‘s aggressive closure of small and inefficient vertical kilns in the past few years, the market remains fragmented. Growth We see significant growth potential for the top producers from consolidation in the market. CR Cement and Sinoma will have the biggest growth, in our view. M&A Activity After the government‘s policies that tighten the capacity, M&A becomes the only way to expand. Acquirers have been active in the sector, with CR Cement, CNBM, and Sinoma being the most rapid consolidators. Competitiveness Margins vary with companies, depending upon the location and demand- supply conditions. W e expect companies with western exposure to have higher margins, given the strong demand growth we expec t.  WHY SHOULD YOU READ THIS REPORT? In 2009, the government announced plans to close all the older inefficient vertical kiln capacity within three years. Even allowing the closures to take two years longer than the government hopes, we see the cement market moving from a capacity surplus of ~180m tpa now to a shortfall by end-2012. W e believe this will result in substantially higher cement prices—witness the 11-44% price rises in some regions in 4Q10 driven by power shortages – and, ultimately, share prices as well.  WHAT HAS THE MARKET MISSED?  There are clear parallels between thermal coal and cement: The policies being implemented in the cement sector now are similar to thos