CSCI-Cement-China Resources Cement (1313 HK)：Another year of strong growth ahead - 20180312

Another year of strong growth ahead

• China Resources Cement (CRC) reported a solid set of 2017 results, driven by higher selling prices and margin expansion, ahead of our expectation.
• Looking forward, we expect CRC to maintain strong growth in FY18E, to be driven by 1) its current cement business exposure and dominant position in the Southeast China region, and 2) its ability to leverage on its strong balance sheet for future M&A expansion when opportunities arise.
• We have revised up our revenue and net profit estimates for FY18E/FY19E by 26.3%/27.3% and 25.2%/26.5%, respectively, and raised our DCF-based price target to HKD7.2 (from HKD6.0), representing 10.5x FY18E PER, on par with its historical range. Our price target represents 16.3% upside potential, hence, we maintain our BUY rating on CRC.

Strong set of 2017 results. CRC reported a solid set of 2017 results with the overall GPM having recovered to the high level seen during 4Q17, thanks to substantial increases in the cement price during the reporting period. Management has proposed to raise the dividend payout ratio in light of a stronger balance sheet and more prudent capex budget for the year ahead. Given that the company has issued profit alert for its 1Q18 results, we foresee another year of strong growth ahead.

Long-term beneficiary of Greater Bay Area development (2017-2030), directly covered by CR Cement’s one-fifth total cement capacity. As per management’s introduction, the Company has become the major cement supplier in the construction of the Hong Kong-Zhuhai-Macao Bridge. We foresee infra projects and related consumption demand would bring better growth prospects, considering the new production lines under construction or scheduled to commence operation.

Potential M&A expansion ahead. Apart from the existing collaboration with other cement players, management hinted that the company will pursue inorganic expansion for the year ahead. Meanwhile, we continue to believe that the company will choose to further consolidate its leading position through raising stakes in its associate companies and joint ventures rather than foraying into less familiar markets or industries. Based on the latest capex guidance, we estimate the Company’s net gearing to come down to below 30% in FY18E, among the lowest levels seen since 2010. Meanwhile, strong cash inflow would continue to facilitate high dividend payouts to investors, in our view.

Attractive valuation. CRC is currently trading at 9.0x FY18E PER and a 5.0% dividend yield, which is undemanding. Our DCF-based price target of HKD7.2 is derived on assumption of a WACC of 11.0%, risk free rate of 3.85%, equity risk premium of 13.0%, and a beta 1.3x. Our PT implies 16.3% upside potential, and thus we reiterate our BUY rating.