Firm beats expectations again, 2Q20 net profit above consensusAnhui Conch Cement announced 1H20 results: Revenue rose 3.3%YoY to Rmb74bn, and net profit attributable to shareholders grew5.31% YoY to Rmb16.1bn; 2Q20 net profit attributable rose 21.5% toRmb11.2bn, largely in line with our expectations, but beat consensus.
Strong sales volume; ASP dipped slightly YoY in 2Q20. Sales volumeof self-produced cement and clinker grew 8% in 2Q20 （-3% in 1H20），since cement demand in Eastern China recovered rapidly in 2Q20following the earlier COVID-19 impact. ASP dropped 3% YoY in 2Q20,as high inventory weighed on cement prices at end-1Q. GP/t dippedonly Rmb7/t in 2Q20 amid falling coal prices, with gross margin of thecement business largely flat YoY. Revenue of aggregate in 1H20 grew3.5% to Rmb477mn, with gross margin up 2.2ppt YoY to 70.8%.
Effective expense control with strong cash flow. SG&A expense/t in2Q20 fell Rmb6/t YoY thanks to rising output and effective SG&Aexpense control, in our view. Operating cash flow in 1H20 grew 0.4%to Rmb14.6bn, driving net cash balance at end-1H to Rmb65bn. Weexpect ACC to have net cash of Rmb150bn by end-2023.
Trends to watch
Full-year earnings to hit new high; strong cash and abundant mineresources to drive rerating. We expect infrastructure projects tomaterialize and accelerate construction in 2H20, bolstering cementdemand in 4Q20. Given continuous price hikes in Eastern China sincelate August, we expect the cement price in 4Q20 to improve QoQ andACC is likely to enjoy both strong sales volume and rising sellingprices in 4Q20. We estimate the peak season for cement in 2H20 maylast longer and prices may rise faster than expected, driving full-yearearnings to a new high. In the next 2–3 years, we think the firm willsee a rerating given its stable earnings, strong cash flow, andabundant mine resource reserves.
Financials and valuation
We keep our 2020 EPS forecast at Rmb6.94, and lift our 2021 EPSforecast by 5% to Rmb7.14 （mainly due to lower expense assumptionfor 2021）。 ACC A-shares are trading at 8.6x 2020e and 8.3x 2021e P/E,and H-shares at 7.3x and 7.1x P/E. Maintain OUTPERFORM withA-share and H-share TPs unchanged at Rmb70 （10.1x 2020e and 9.8x2021e P/E with 17.9% upside） and HK$77 （10x 2020e and 9.7x 2021eP/E with 34.1% upside）。
Risks
Heavy rainfall in peak season; disappointing demand.