Initiate at Buy: Solid story in one of the best cement markets

Disclosures & Disclaimer 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. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com ✔VoteinAsiamoneyBrokersPoll20164July-12AugustIf youvalueourserviceandinsight,voteforHSBCClickheretovote  CHP is the third largest cement producer in the Philippines, a market that has been delivering on its growth potential  Excluding the one-off impact from lower royalties, the EBITDA CAGR of 10% in 2016-18e is driven by high sector utilization supporting stable margins as well as economies of scale  Initiate at Buy with a target price of PHP16.6 based on a 1-year forward EV/EBITDA of 13.6x; top pick in ASEAN Cement A scaled-up player: CEMEX Holdings Philippines (CHP) consolidates all of the manufacturing assets of its parent, CEMEX, in the Philippines. It is the third largest cement producer in the country with a market share of c.20% by volume in 2015 and a capacity of 5.7m MTPA. Its larger 3.8m MTPA plant in Visayas has given it a 40% market share in that region. In addition, CHP has a 14% market share in Luzon, the country’s most populous region and home to two-thirds of national cement demand. CHP’s 1.9m MTPA Luzon plant is nearly fully utilized and, in the near term, it plans to defend its market share with imports before adding capacity by 2019e. One of Asia’s most promising cement markets: The Philippines cement demand grew at a 12% CAGR in 2011-15, yet its per-capita consumption is still one of the lowest in Asia. This leaves plenty of room for growth. Indeed, demand continued to grow at a pace of 12% YoY in 1H16 as the government continued to deliver on its infrastructure promise. We see the country’s current account surplus, low inflation and low fiscal deficit as enablers of cement demand and forecast high single-digit demand growth p.a. in the next three years. Furthermore, with the sector’s utilization rising to 88% last year, we foresee steady 3% price growth p.a. and stable margins. EBITDA CAGR of 10% in 2016-18e after one-off gain from restructuring: We estimate EBITDA growth of 130% in 2016e, as operational restructuring lowers royalties and insurance expenses by 13% of sales. We expect CHP’s underlying net profit to increase by 105% in 2016e but reported net profit growth to be slower at 53% YoY due to one-off gains in 2015. EBITDA growth should be sustained at 16% YoY in 2017e due to the full-year impact of lower insurance expenses and the benefits of economies of scale on SG&A. In addition, the underlying net profit growth is likely to be c40% as benefits of lower interest costs flow through the P&L. TP of PHP16.6 based on 1-yr fwd EV/EBITDA of 13.6x; initiate at Buy: Our target EV/EBITDA multiple is at a 24% premium to the historical average of Thai and Malaysia cement multiples. In our view, the target multiple must account for both the lower cost of capital of the Philippines (similar to Thailand/Malaysia) and the higher growth offered by it. Our target multiple is similar to the current multiples of CHP’s Indian peers, which offer higher growth but at a higher cost of capital. Changes in government spending on infrastructure, remittances and energy costs are key risks. 10 August 2016 INITIATE AT BUY TARGET PRICE (PHP) PREVIOUS TARGET (PHP) 16.60 SHARE PRICE (PHP) UPSIDE/DOWNSIDE 12.30 +35.0% (as of 09 Aug 2016) MARKET DATA Market cap (PHPm) 63,903 Free float 45% Market cap (USDm) 1,361 BBG CHP PM 3m ADTV (USDm) RIC CHP.PS FINANCIALS AND RATIOS (PHP) Year to 12/2015a 12/2016e 12/2017e 12/2018e HSBC EPS 0.26 0.52 0.73 0.78 HSBC EPS (prev) - - - - Change (%) - - - - Consensus EPS - - - - PE (x) 48.2 23.5 16.8 15.8 Dividend yield (%) 0.0 0.0 0.0 0.0 EV/EBITDA (x) 20.9 11.9 10.1 10.0 ROE (%) 6.3 10.4 12.0 11.3 52-WEEK PRICE (PHP) Source: Thomson Reuters IBES, HSBC estimates Shishir Singh* Analyst, ASEAN Materials The Hongkong and Shanghai Banking Corporation Limited shishirkumarsingh@hsbc.com.hk +852 2822 4292 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Cemex Hldgs Philippines (CHP PM) EQUITIES CONSTRUCTION MATERIALS Philippines 10.0014.0018.00Jul 16Target price: 16.60High: 12.46 Low: 10.96 Current: 12.30Initiate at Buy: Solid story in one of the best cement markets  EQUITIES  CONSTRUCTION MATERIALS 10 August 2016 2 Financial statements Year to 12/2015a 12/2016e 12/2017e 12/2018e Profit & loss summary (PHPm) Revenue 23,938 27,023 29,814 31,838 EBITDA 2,927 6,742 7,839 8,108 Depreciation & amortisation -873 -1,121 -1,064 -1,069 Operating profit/EBIT 2,054 5,620 6,775 7,039 Net interest -65 -1,474 -1,350 -1,265 PBT 2,845 4,776 5,425 5,774 HSBC PBT 1,988 4,146 5,425 5,774 Taxation -661 -1,433 -1,628 -1,732 Net profit 2,183 3,343 3,798 4,042 HSBC net profit 1,3