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Morningstar | Anhui Conch Reports Robust Earnings on Higher Average Selling Price; Shares Undervalued

Narrow-moat-rated Anhui Conch Cement, or ACC, saw net profit of CNY 20.8 billion for the first nine months of 2018, up 111% year over year. This was in line with our expectations on the back of higher sales volume and average selling price. We retain our earnings forecast and fair value estimate of HKD 52 (CNY 45.50). Following the recent share price correction, we think ACC is undervalued at the current share price. While there are concerns on the slowing infrastructure and property sector in China, we believe ACC will continue to benefit from the government’s supply-side reform.

ACC’s cumulative nine-month sales volume and average selling price grew about 13% and 38% year over year, respectively, benefiting from the supply-side reform by the government. Third-quarter net profit was up 151% year over year, aided by higher sales volume and average selling price. While the firm’s gross margin declined to 37% in the third quarter from about 44% in the previous quarter, this was largely due to increased sales in the lower-margin trading business. The market is concerned about the falling fixed-asset investment and cooling real estate sector in China. However, we expect these to stabilize going forward with improving infrastructure spending, as the government has started selective easing to mitigate the impact of the ongoing trade war. In addition, recent measures to increase liquidity (cuts in the reserve-requirement ratio) will likely lead to some liquidity flowing to the property sector as well.

While we remain bearish on China’s long-term cement demand, we think the recent sell-off on ACC is overdone, given its leadership position in the industry and its strong balance sheet (net cash). Meanwhile, cement prices in China remain firm and several cement producers have announced price hikes in the fourth quarter.