CSCI-Cement-China Resources Cement (1313 HK)：Solid margin expansion on track - 20171023

Solid margin expansion on track

• China Resources Cement’s net profit for Jan-Sep17 surged 215.9% YoY on the back of strong margin expansion, which had been alerted by the company and is in line with our expectation.
• We remain optimistic on CR Cement’s mid-term growth outlook, given the strong demand in its operating regions where supply is declining as well as potential acquisition opportunities.
• Trading at FY17E 11.6x PER and 9.8x FY18E, CR Cement’s valuation is undemanding in our view, reiterate Buy and maintain price target at HKD6.0.

Strong 3Q17 results were in line with our expectation. Net profit increased 215.9% YoY to HKD2,649mn during Jan-Sep17 of 2017, on the back of strong margin expansion. Revenue increased 16.4% YoY to HKD20,345mn in the same period. On a third quarter basis, revenue and net profit grew 16.1% and 73.7% YoY, respectively.

Rising prices more than offset lower sales volume in Guangdong and Guangxi regions. The off peak production measure has lowered the cement production on an industry wide basis. In the first nine month period, CR Cement’s cement (and clinker) sales volume has decreased 2.5% YoY; however, the average selling price of cement and clinker products had increased 22.1% YoY over the same period, and thus combined with the benefit of stable production costs of coal and other raw materials, the consolidated gross margins of cement and clinker products for CR Cement have increased to 30.8% and 24.5% in 9M17, up from 24.9% and 7.0% in 9M16. By regions, Guangdong and Guangxi remained the major sales volume contributing provinces, accounting for an aggregate 69% of total, versus 67% in 9M16. Cement sales volume for this region has decreased 5.8% YoY; however, the average selling price of cement had increased 16.1% YoY over the same period.

4Q17 price uptrend is likely to continue. As of end-Sep, the company’s leverage ratio had further reduced to 49.4%, from 56.5% as at end-2016. Based on the company’s development plan, CR Cement will invest in two more projects during the rest of 2017 and 2018. We believe the capex required will not have a significant impact on the company’s deleveraging. As per industry report, cement prices in CR Cement’s major market regions have continued to increase since late-Sep, and thus, we anticipate CR Cement to continue to report strong earnings results for 4Q17 as well as for the full year.

Valuation and recommendation. Trading at 11.6x FY17E and 9.8x FY18E PER, with respective estimated dividend yield of 3.9% and 4.6% , which are among the sector’s highest, we believe the company’s valuation is undemanding. We reiterate our Buy rating and maintain our price target at HKD6.0.