EUR 850.00 For Business Accounts Only

Morningstar | Anhui Conch’s First-Half 2018 Positive Profit Alert Beats Expectation; Increasing FVE to HKD 52. See Updated Analyst Note from 27 Jul 2018

We increase narrow-moat Anhui Conch Cement’s, or ACC’s, fair value estimate to HKD 52 per share (CNY 45.50 per share) from HKD 45 (CNY 36) to take into account the firm’s strong earnings, partly offset by a depreciating Chinese yuan. ACC guided that first-half 2018 net profit will increase by 80%-100%, which accounts for 65%-77% of our previous full-year forecast. We raise our 2018-19 earnings estimates by 29%-34%, and we will issue an update pending more detailed information from the firm’s final results in late August. We consider shares fairly valued at the current price level.

ACC attributed the sharp rise in earnings to the significant increase in selling price of the firm’s products. We think the cement industry has benefited from the government’s supply-side reform, but we believe the current price strength will be difficult to sustain in the longer term, as overcapacity remains a key problem for the industry. Our long-term view on cement demand is bearish, as we expect both fixed-asset and real estate investments to slow after China’s stimulus spending subsides. We forecast anemic growth of less than 0.5% per year on average for China’s cement demand over the five-year period. As such, we only expect ACC’s average selling price to grow at a modest 2% CAGR over the next five years, taking into account the firm’s leadership position in the industry.