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Morningstar | Anhui Conch Cement Reports Robust 1Q Results on Higher Selling Prices; Shares Fairly Valued

With first-quarter results within expectations, we think narrow-moat Anhui Conch Cement is fairly valued at its current share price, which already reflects stronger near-term cement prices. Anhui’s first-quarter 2019 net profit was up 27% year over year to CNY 6.1 billion, accounting for 23% of our full-year forecast. Given that the first is seasonally a weak quarter, we view the results as largely in line. We are keeping our fair value estimate of HKD 52.00 (CNY 44.00) unchanged. Our long-term view on cement demand is bearish as we expect both fixed-asset and real estate investments to slow eventually because of China’s transition to a consumer-driven economy. We expect the firm's average selling price to decline at a moderate pace and we have already factored in slowing growth in Anhui’s earnings.

While operating statistics were not disclosed in the first-quarter results, we believe the stronger results were mainly due to higher sales volume and selling prices for its products. We note that average cement prices in China rose about 7% year over year in the first quarter of 2019. On the other hand, the firm’s gross margin fell to 31% from 41%, a year ago, likely because of increasing sales from its newly created trading platforms, which has close to zero margin.

While we expect cement players to continue to benefit from supply-side reform in China. A recent antitrust meeting between the government and cement players on the issue of rising cement prices may indicate that future cement price hikes could be more moderate. China’s cement production was up 9.4% year over year in the first quarter on the back of expectations of rising infrastructure spending by the government. However, this may lose steam going forward as part of the stimulus funding came from local-bond-issuance front loading.