1H17 NDR takeaways in HK - more earnings surprise to comeInvestors' perception that WCC is merely a Conch M&A proxy is about tochange. During the NDR, management was optimistic about its supplydemandoutlook, new revenue streams, potential of a strong dividend andimminent credit rating upgrades, which all lead us to conclude that WCC willbe the highest earnings growth cement company in 2017E and 2018E. WCChas fully enjoyed the perks of working with Conch in 2017, so further tie-upwith Conch will have limited benefit. WCC is off to a strong start in 3Q, andtaking into consideration explosive infrastructure starts and aggregates’
　　contribution, we raise FY17/18 earnings by 31/53% and TP to HKD1.70/share.
　　Strong start to 2H; promising long-term demand outlookIn mid-July, cement prices in Shaanxi were hiked by RMB50/t, one of the fewprovinces in China that managed to raise and not cut prices. Price hikes duringthe slow season mean price discipline is ever so strong. By 4QE, the hugebacklog of infrastructure and property project starts should push prices evenhigher. WCC is on track to clear GP/t of RMB70/t in August vs. RMB55/t in 1H,prompting our earnings revisions. WCC is also well positioned to benefit fromNW China's OBOR demand growth story, where five-year cumulative FAIspending is expected to increase by 79%/110% for Shaanxi and Xinjiang duringthe 13th five-year plan compared to the 12th five-year plan.
　　Aggregates - a major earnings driver in 2018; the Street has missed thisDue to environmental reasons leading to the shutdown of small limestonequarries, WCC sees an attractive opportunity to branch into aggregates in2018. The initial plan will be to roll out 16mt of aggregates capacity acrosseight plants by 1Q18 with an investment of c.RMB400m, spread over twoyears. Aggregates prices have doubled in the last 12 months, with the Shaanxiex-factory price at RMB100/t. The cost of production is extremely low atRMB20/t, so WCC stands to make an additional RMB300m in 2018E (or 50% of2017E earnings), even just by selling 6mt of aggregates at NP/t of c.RMB50/t.
　　A punchy dividend saved for full-year resultsWhile WCC was in a position to pay an interim dividend, the company decidednot to, given the tightening liquidity conditions in China. After the price war in2015, WCC learned to become extremely prudent. It believes that an RMB2bncash safety net is necessary given macro uncertainties and the slim possibilityof a price war reigniting. With RMB1.6b of cash on hand by 1H17 andexpected c.RMB700-800m of FCF in 2H, there is still room to pay c.RMB300-400m in dividends during the full-year results, by our forecasts. This representsa c.50% payout, higher than WCC's normal 25% dividend payout policy.
　　Changing valuation methodology from replacement cost to P/ESince we no longer see the need for Conch M&A, we have reverted to ournormal sector methodology of P/E. We derive our target price from 9x FY18Eearnings, which is inexpensive considering its 52% earnings growth, butdiscounted from 10-11x normally due to the time lag. Risks: a price war andhigher coal prices. See p. 8.