After three years of price war and oversupply in Shaanxi, earnings for WCChave troughed and are now recovering strongly as a result of strict pricediscipline. On March 14, WCC announced RMB20/t of price hikes, as inventorylevels are empty after successful production halts throughout winter. Thechange in political landscape could also be a major catalyst for future demand,with Xi'an's new party secretary being a close ally to Xi. His mandate is todevelop a “grand Xi'an.” Thus, infrastructure projects are being started, andmajor investments by the likes of Wanda/Greenland/Alibaba will likely takeplace. The deal with Conch is on the table but it will unlikely be imminent.
　　Cooperation with Conch
　　WCC does not rule out further equity partnership with Conch, but both partiesare still in a 12-month cooling period that expires June 30, 2017. Managementbelieves that NW China is a key growth region for Conch, while WCC is themost dominant cement player in Shaanxi. As WCC's second largestshareholder, Conch has two board seats and has had a positive impact onWCC thus far. For example, WCC's new head of procurement from Conch hashelped reduce costs by RMB5-10/t in 2016 through introducing a bettermaterial mix and new channels to purchase cheaper materials.
　　Resuming dividends and paying down debt
　　With WCC putting the brakes on capacity growth, capex requirements shoulddrop off significantly in the next few years （RMB150m/100m in FY17/18）。 WCCexpects GP/t to be sustained at RMB50-55/t for 2017, which would translate tooperating cash flow of c.RMB1.2bn in 2017 by our estimates. At 20%/23% FCFyield in 2017/18, WCC is the highest in the cement industry. With ample cashof RMB1.3bn at end-2016, WCC has repaid RMB400m from its STN, andfurther debt repayments can be expected in 2017. WCC also expects dividendsto resume after a two-year suspension and does not rule out even a specialdividend in 2017. By the end of 2017, WCC's net gearing should drop to <30%.
　　Valuation and risks
　　We derive our target price of HKD1.38 based on EV/t of RMB350/t, reflectingthe lower end of a potential M&A deal with Conch （Conch's average cost inWCC is at HKD1.35）。 Our target price also implies 1x FY18E P/B on 10% ROE,which we believe is justified in a normalized year. Risks: breakdown of pricediscipline in Shaanxi and a higher-than-expected hike in coal prices.