Trip takeaways: it's for real but it's not 2009

Deutsche Bank Markets Research Asia China Resources Construction Materials Industry China Cement Date 11 May 2016 Recommendation Change Trip takeaways: it's for real but it's not 2009 Government supportive of investment – cyclical rebound to occur in 2H ________________________________________________________________________________________________________________ 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) 057/04/2016. Johnson Wan Research Analyst (+852 ) 2203 6163 johnson.wan@db.com Key Changes Company Target Price Rating 0914.HK 23.00 to 24.40(HKD) Hold to Buy 0586.HK 17.25 to 19.03(HKD) - 600585.SS 19.10 to 20.50(CNY) Hold to Buy 2009.HK 7.51 to 7.12(HKD) - 601992.SS 6.25 to 5.92(CNY) Sell to Hold Source: Deutsche Bank Top picks Anhui Conch Cement (0914.HK),HKD18.30 Buy CR Cement (1313.HK),HKD2.29 Buy BBMG (2009.HK),HKD4.97 Buy Source: Deutsche Bank DBe vs Cons (FY16E) DBe Cons % diff Conch 1.70 1.39 23% CV 1.27 1.05 20% BBMG 0.48 0.53 -8% Source: Deutsche Bank Earning revision (FY16E) DBe (new) DBe (old) % diff Conch 1.70 1.47 16% CV 1.27 1.15 10% BBMG 0.48 0.45 7% Source: Deutsche Bank In this report we change recommendations, target prices and estimates for companies under our coverage; see Figure 1 for details. We visited local governments, banks, construction companies, and cement producers across China in the first week of May. We saw pockets of exceptional demand strength in Northern and Southern China, but in general, cement sales in May normalized after massive restocking in March and April. Ample credit conditions in 1Q16 have paved the way for a resurrection in infrastructure and property starts, in particular property. Given that the typical construction cycle for these projects lasts one to two years, we can be more positive on 2H. We ugrade Conch to Buy with target price of HKD24.4. Loan growth higher for 2016. Top-down view positive for cement demand Both large and small banks were supportive of lending to infrastructure and property to fulfill the government’s directive of boosting growth, but it is not 2009. In 2009, Total Social Financing (TSF) grew by 35%, but in contrast, the government is targeting no less than 13% for 2016. Given that TSF grew c.17% yoy in 1Q16, a slowdown in TSF in subsequent quarters is likely but within expectations. However, we note that: 1) previous loosening cycles all lasted at least 15 months, and the current cycle is only six months; and 2) 6MMA cement demand growth is 66% correlated to “6MMA new TSF” with a four- to five-month lag. Cement demand growth just turned positive in March, so demand growth should continue to turn positive in subsequent months. Sustainability of demand Based on our channel checks, many infrastructure projects planned since 4Q15 and 1Q16 have now received the principal funding and construction has begun. On March 28, the Ministry of Transportation released a three-year plan for transport infrastructure. Total investment will reach RMB4.7tr, of which 131 major projects or RMB2.1tr will start in 2016. We also saw signs that property starts have been accelerated due to strong sales of late. Companies involved with concrete piles (used mainly for foundation for property construction) are currently running at full capacity, meaning that the peak time for property construction will occur in six months’ time or in 4Q. Upgrading FY16/17 demand growth to 1.5%/0.5%. Valuations and risks We are positive on cement stocks after the recent correction, as the driver behind the price hikes ytd has been demand and not supply. Given this as well as leading producers’ willingness to boost profitability, we expect higher cement prices for the remainder of the year despite volatility. Near-term weakness in cement prices or stocks should be a good entry point. We also updated our supply-demand model for cement to reflect the positive change in demand. The longer-term implications of this short-term burst in demand are negative, as it has helped some smaller producers to recover, thus delaying the longer-term consolidation story for cement. Hence, the removal of 32.5 cement remains the key to resolve the overcapacity in cement. Our regional top picks are BBMG (North), CRC (South), and Sinoma (West), regions where we expect a sharp turnaround in profitability for 2016. Conch looks attractive after its recent sell