Profitability restored amid better price discipline; reiterating Buy
After a price war in 1H16, WCC has restored its profitability with 1H17 EPS ofRMB0.04/sh, implying 47% and 48% of FY17 DBe and consensus. The strongset of 1H results was last seen in 1H14 when WCC recorded EPS ofRMB0.035/sh. Stripping out the FX gain, core earnings come in at RMB173mnversus a loss of RMB57mn in 1H16. The only disappointment in the result wasthat WCC decided not to pay an interim dividend despite its strong cash flowwhere the company generated RMB492mn in FCF. WCC has opted to keepmore cash on hand for now due to tightened liquidity conditions. However, thelikelihood of returning to normal dividends in the full year result is likely.
1H17 GP/t up 203% yoy; competition in Central Shaanxi faded
1H17 GP/t rose to RMB55/t from RMB18/t in 1H16. This margin expansion wasdue to the price recovery in Shaanxi, which increased 1H17 cement ASP by24% yoy to RMB240/t. Noticeably, ASP in Central Shaanxi, where competitionhas been fierce in the past, also achieved RMB232/t, up 42% yoy in 1H17. TheASP spread between South and Central Shaanxi, a measure of marketcompetition in Central Shaanxi, has narrowed to merely RMB10/t fromRMB52/t in 1H16. WCC’s overall sales volume in Shaanxi reached 7.2mt, up1.6%, beating Shaanxi’s overall 1.3% yoy volume decline in 1H17. In Xinjiang,ASP climbed 12% to RMB287/t, while volume increased 2.5% yoy because ofthe 32.5 grade cement removal. In Guizhou, both ASP and volume are up30.0% and 21.3% yoy, respectively, with better price discipline. We believeWCC is on track and could even beat our target GP/t of RMB50/t in FY17E.
Ongoing deleverage and piling up cash; another dividend story
WCC has made further progress to reduce its debt in 1H17. It first paid downhalf of its RMB800mn expensive onshore MTN in Mar-17 and managed to shiftsome of its funding needs to cheaper bank loans. Meanwhile, cash toppedRMB1.6bn (vs. RMB1.3bn in FY16) and net gearing ratio dropped further to37% from 45% in FY16. Also, WCC technically would be able to repay itsUSD400mn bond by paying 3.25% premium starting from Sep-17. However,we believe WCC will first opt to repay its RMB400m STN due Mar 2018 first.WCC’s FCF yield continues to be the highest across peers at 21%. With such astrong FCF (DBe: RMB1.1bn in FY17) with limited capex plan, we believe WCCwill resume dividend payout with its strong cash balance/FCF and dividendyield could reach 5.1%/7.4% in FY18/19.Shaanxi and Xinjiang outlook: stronger pricing and demand ahead6M17 cement market prices in Shaanxi have been steady at an average ofc.RMB333/t for high-grade cement, but starting in July, Shaanxi ASPs havebeen raised by RMB35/t. As for Xinjiang, low-grade cement has beeneradicated since May 1, 2017 so WCC is enjoying exceptionally high pricing inXinjiang now, with Hotian prices now at RMB370-380/t currently. 1H17 FAIand REI continues to accelerate at 14.2% yoy and 16.4% yoy for Shaanxi and24.6% and 14.6% for Xinjiang, respectively, far exceeding the single-digitgrowth achieved in 1H16. With strong infrastructure pipelines in bothprovinces, we expect an even stronger 2H ahead for pricing.