CSCI-Cement-China Resources Cement (1313 HK)：Good margins for 2Q18, but likely priced in - 20180607

Good margins for 2Q18, but likely priced in

• We expect China Resources Cement (CRC) to achieve stronger unit gross dollar margin in 2Q18, on higher prices and strong sales volume. Meanwhile, we see risks of slowing sales amid the raining season in the coming months.
• From a longer-term perspective, we believe CRC will continue to benefit from the deepening supply-side reform and Greater Bay developments.
• After the recent strong run in share price, CRC is trading at 10.7x FY18E PER, at the higher-end of its historical forward PER range. Although we consider a 4.2% dividend yield attractive as compared to the prevailing treasury yield, we downgrade our rating on CRC to HOLD, but at the same time raise our DCF-based price target to HKD10.0, representing 11.0x FY18E PER.

Robust operating data is expected for 2Q18. Based on our latest conversation with the company, cement sales volume has continued to pick up in the past two months reaching 7.7mn tons in April and 7.9mn tons in May, representing consistently low inventory levels of less than one week on average. Meanwhile, as the average selling price has remained stable at around HKD380/ton, we estimate average coal procurement cost has dropped to below HKD800/ton, thus widening the quarterly margin.

Seasonal cement price pressure in coming months. In anticipation of the upcoming wet season, we expect cement sales volume to drop slightly leading to lower selling prices in the near term. As such, we have revised down our average selling price forecast for FY18E and have also revised up our unit gross dollar margin assumption for FY18E to HKD150/ton vs. HKD148/ton and HKD94/ton achieved in 1Q18 and 2017, respectively.

Long-term beneficiary of Greater Bay Area and “Hainan free port” development. As the Chinese government has planned to develop Hainan as an International Tourism Island and a free-trade port, forging closer cooperation within the Greater Bay Area, and to reach out to economies in the Indian Ocean and other parts of Asia under the belt and road plan, we believe such strategic policies would bring positive impact on cement consumption, in anticipation of acceleration in infra project investments and the future real estate development needs. Both Guangdong Province and Guangxi region have planned to boost infra-related investment during the 13^th Five-Year plan period. Cement consumption of the two provinces had seen positive growth year to-date.

In transition to longer term sustainable growth. We believe the expansion of cement product capacity in China in 2018 will be strictly off-limits. For CRC, we expect full-year contribution from its 2mtpa production line in Hepu County which commenced operation towards the end of last year. The 2mtpa cement capacity project under construction in Guizhou (Anshun) is scheduled to commence commercial operation at the latest in 2Q19. Moreover, CRC is diversifying into new businesses such as prefabricated construction and aggregates, and co-processing of hazardous industrial waste.

Fairly valued. CRC is currently trading at a fair valuation of 10.7x FY18E, at the higher-end of its historical forward PER range. CRC’s dividend yield remains attractive at 4.2% compared to its treasury yield. We raise our DCF-based price target to HKD11.0, translating into 11.0x FY18E PER.