EUR 850.00 For Business Accounts Only

Morningstar | Anhui Conch’s 2018 Earnings Aided by Robust Selling Price and Sales Volume; Dividend Disappointed

Producing more than 200 million tons of cement annually, Anhui Conch Cement is one of the largest cement producers in China and in the world. Closely tied to infrastructure and real estate construction, China’s cement industry is challenged by the shift toward a less construction-intensive economy. However, we believe Anhui Conch's strong balance sheet and best-in-class mining assets leave it best positioned to weather slowing investment in China and achieve modest market share gains at the expense of overleveraged competitors. The firm’s main rivals have achieved growth mainly through acquiring small to midsize cement businesses, but the acquired technology is generally outdated, and premium prices paid have hindered investment returns. Alternatively, Anhui Conch has adapted the advanced dry process in building new plants and was the first cement company in China to harness waste heat and municipal waste to produce electricity. With the firm employing new technologies and a better production process coupled with a stricter permit quota to build new cement plants, Anhui Conch's technological edge is defensible and difficult to replicate. In recent years, missteps in the firm's strategies have allowed competitors such as China Resource Cement and China National Building Material to not only gain market share, but also snatch up high-quality assets. The fight for the southern Chinese market centers on the Pearl River Delta. Here, Anhui Conch chose to acquire mining assets with railroad access over those near water transport. This enabled China Resources Cement, the firm's closest competitor in this region, to build cement plants near high-quality mining assets with access to shipping. Similarly, Anhui Conch botched a key opportunity to acquire regional market leader Jiangxi Cement, which was later purchased by China National Building Material.Cement demand growth is slowing from an abnormally high rate, and smaller cement companies with inferior cost structures and larger competitors with weak balance sheets are vulnerable to a downturn. We expect Anhui Conch to further increase its market share as smaller cement plants are driven out of the market.