Morningstar | Anhui Conch’s 1H Results Underpinned by Higher Selling Prices and Effective Cost Control; FVE Intact. See Updated Analyst Note from 23 Aug 2018
Narrow-moat-rated Anhui Conch Cement’s first-half 2018 net profit of CNY 13.0 billion, up 92% year over year, was in line with the positive profit alert announced in July. After updating our valuation model, we retain our fair value estimate of HKD 52.00 (CNY 45.50), with higher near-term earnings offset by the depreciation of the Chinese yuan against our Hong Kong dollar fair value estimate. We believe Anhui Conch will continue to benefit from the government’s supply side reform and we think shares are presently undervalued.First-half sales volume was impressive, with the firm achieving growth of 7% year over year versus a 0.6% decline in industry production growth. More importantly, Anhui Conch’s average selling price surged 35% year over year on the back of supply side reform, stricter environmental regulations, and better discipline among industry players. Despite unit cost rising by 11% year over year due to higher raw material and energy prices, the company’s gross margin improved to 43% from 31% a year ago, thanks to stringent cost controls implemented by management. Going forward, Anhui Conch guided that demand should remain stable in the second half, as infrastructure spending and real estate investment will continue to grow. We think this is generally in line with the government’s rhetoric to selectively increase infrastructure investment in the near term to cushion the impact of the China-U.S. trade war. Meanwhile, management expects supply to fall due to ongoing government efforts to enforce environmental protection.
To reduce its reliance on the domestic market, Anhui Conch is expanding overseas and has a presence in Cambodia, Indonesia, Laos, Myanmar, Russia, and Uzbekistan. That said, revenue from its overseas business remains less than 5% of total revenue, and we do not anticipate meaningful earnings contribution in the near term.
Meanwhile, the firm is in a net cash position and we expect it to be proactive in seeking acquisition opportunities, given its strong balance sheet.
Anhui Conch Cement Company Limited is a China-based company principally engaged in the production and sales of cement and cement products. The Company's cement varieties mainly include 42.5 grade cement, 32.5 grade cement and 52.5 grade cement. The Company's products are widely used in national infrastructure construction, including large engineering projects such as railways, highways, airports and water conservancy projects, as well as urban real estate, cement products and rural markets. In addition, The Company is also engaged in production and sales of clinker, aggregate and gravel as well as commercial concrete. The Company distributes its products within the domestic market and to overseas markets.
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