BBMG 1H18A NP was Rmb2.41bn, or EPS of Rmb0.226, both up31% YoY. Excluding one-off items including asset write-downs,recurring profit comes to Rmb2.37bn, up 21% YoY, 22% ahead ofour estimates mainly due to higher than expected ASP in propertysales, better cement margin partly offset by lower concrete volume.
Cement segment （50% of total gross profit in 1H18A） reportedgross profit was Rmb4.91bn, up 31% YoY, slightly lower thanexpectation as stronger cement margin was offset by lowerconcrete volume. Sales volume of cement/clinker was 43.6mnt,down 5% YoY, slightly behind our expectation. Unit GP wasRmb106/t, up Rmb34/t YoY - we estimate implied 2Q18A unit GPwas Rmb117/t. Unit SG&A was Rmb71/t, up 5% YoY, driven mostlyby lower sales volume.
Property development segment （32% of total gross profit in1H18A） gross profit was Rmb3.18bn, up 35% YoY, much ahead ofexpectation driven by higher ASP. The booked area was 431k squaremeters, up 6% YoY. ASP was Rmb23158/m2, up 28% YoY. On theproperty development segment, BBMG guided for higher bookedand presale revenue in 2018E YoY （Rmb21.4bn and Rmb27.0bnrespectively）， as better pricing more than offset lower GFA sold.Specifically, management guided for 920k square meters GFAbooked in 2018E, with revenue of Rmb21.4bn （up 34% YoY）， impliesfull-year ASP of Rmb23093/m2.
Property investment and management segment （11% of totalgross profit in 1H18A） gross profit was Rmb1.1bn. Gross GFA of invproperty was 1085k square meters, up 52% YoY.
Net debt was Rmb81.1bn, up 11% YoY, with net gearing reaching149%, versus 135% at the end of 2017, higher than expected. AP days declined to 94 days （256 days in 1H17A）， down 63% YoY. AR days and inventorydays are mostly stable YoY. Operating cash flow was Rmb-3.6bn, still negative but muchimproved than last year.
We maintain our cautious view on the construction demand outlook in 2019E, in thecontext of a slowdown/contraction in local government infrastructure projects, led by thePPP projects cleanups in 1H18A, and persistent tighter control in financing structure fornew projects. We expect the negative impact of demand on margin will emerge in2H18E in central, western and northern regions where intrinsic oversupply is moreprevailing, and then likely to affect the coastal region thereafter. On a parity basis, weexpect the unit gross profit of BBMG to fall to Rmb70/t in 2019E, higher than historicallevel, yet nearly 29% lower YoY versus an average Rmb99/t for 2018E.
Estimates and target price revised upward
We revise up net profit by 34% for 2018E, flat for 2019E and down by 6% for 2020E onthe back of changes in our unit gross profit assumption （higher for 2018E and mildchanges for 2019E）。 We also incorporate a stronger margin outlook for non-cementbusinesses. Valuation remains undemanding, we upgrade our rating for A-share to Buyfrom Neutral and maintain our Buy rating on H-share, with a revised 12-month targetprice of HK$4.6 for H （from HK$4.2）， and Rmb5.5 for A （maintain Rmb5.5）。 Our targetprice methodology remains unchanged, based on historical P/B vs. ROE correlation - or2019E P/B of 0.97x/1.01x at an ROE of 6.1%. Since we initiated on BBMG-A with aNeutral rating on November 20, 2017, the stock is down 38% vs. CSI300 -19.1%.
Key risks: 1） better-/worse-than-expected cement prices driven by industrysupply-demand balance that could swing on demand uncertainty, government supplypolicies; 2） greater-/weaker-than-expected cost pressure from coal, power and other rawmaterials; and 3） slower-/faster-than-expected execution on PC32.5 elimination.