CSCI-Cement-China Resources Cement (1313 HK)：GPM reached a record high in 1Q18 - 20180424

GPM reached a record high in 1Q18

• China Resources Cement (CRC) reported a solid set of 1Q18 results, driven by higher selling prices and margin expansion, ahead of market expectation.
• Looking forward, we expect CRC to maintain strong growth in FY18E, to be driven by (1) likely sustainable cement prices, (2) regional development policies leading to more favourable dynamics of the local markets in Southeast China and Hainan, and (3) continuous production efficiency improvement.
• We have revised up our FY18E revenue and net profit estimates by 1.1%/18.4%, and raised our price target to HKD9.0 (from HKD7.2), representing 11.0x FY18E PER, which is undemanding in our view, and thus reiterate BUY.

Strong 1Q18 results driven by gross margin reaching a record high. Net profit surged 196% YoY in 1Q18, driven by GPM recovery to the record high levels seen during the 1Q thanks to the substantial cement price hikes outweighing the increase in coal cost. Meanwhile, SG&A expenses reduced further on management’s efforts in continuously improving the overall operational production efficiency.

Supply-side collaboration remains supportive for higher cement prices. We believe the expansion of cement production capacity in China will be strictly off-limits in 2018, contrary to consumption drivers in the Southern region which is expected to see stable growth, which will favour the company’s sequential earnings growth prospects, in our view.

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. Based on the industry data, there is a limited number of pipeline cement projects in Guangdong Province and the Guangxi region, which suggest the overall industry outlook for CRC remains positive.

Positive earnings outlook. We expect CRC’s cement sales volume to increase 2.5% YoY in FY18E, driven by the full-year contribution of its 2mtpa production line in Hepu County which commenced operation towards the end of last year. In anticipation of rising cement prices entering the high season, we have revised up our gross dollar margin assumption for FY18E to HKD142/ton vs. HKD148/ton achieved in 1Q18 and up from HKD94/ton in 2017.

Attractive valuation. CRC is currently trading at an undemanding valuation of 9.6x FY18E PER and a 4.7% dividend yield. Our revised DCF-based price target of HKD9.0 translates to 11.0x FY18E PER, which is in line with the average of its 5-yr historical level, and implies 14.8% upside potential; thus, we reiterate our BUY rating.