West China Cement attended DB’s Access China conference in the week of Jan8. Highlights of the key takeaways are as follows
1. Recap of 2017. Shaanxi demand grew 2-3% but WCC volumes were at5% mainly due to strength in South Shaanxi, Xinjiang and Guizhou. Incentral Shaanxi, demand remained flat. The biggest change was the pricewhich has been on an uptrend since the beginning of the year. Therefore,WCC issued a profit alert for 2017.
2. Demand. 2018 will be extremely positive with demand expected to grow5% due to strong infra demand. Two high speed railways will startconstruction in 2Q, i.e. Xi-an to CQ and Xi-an to Yanan. Also, four orfive inter-city railways such as the Xian to Hancheng railway. Real Estateremains strong as inventories are very low in Shaanxi. The demand shouldbe quite optimistic for the next few years and not just for 2018 as theseprojects will take a few years to construct.
3. Pricing. Oversupply still exists and utilization rate will remain at 65-70%.
The pricing can be maintained at a high level in 2018 because: 1） no newsupply, 2） market coordination is beneficial to everybody so no reason tobreak it, 3） environmental pressure by the government such as we haveto stop kilns for 100 days. In 2018, profit will improve as we begin 2018at a very high price level.
4. Aggregates. WCC has opened 8 quarries with capacity reaching 16mtby 2Q18. WCC believes a conservative sales number is 5mt for 2018 buthope to sell closer to 10mt. The ex-factory price for aggregates is highat RMB80-100/t with market price at RMB120/t. However, after they startselling, they don’t rule out price dropping maybe to RMB50/t. The grossmargin is 60%+ so payback is less than two years. The total investmentis RMB500m for 16mt and WCC has spent RMB200m in 2017 and likelyanother RMB200m in 2018.
5. USD400m bond. The expiry will be in Sep 2019 so WCC plans to dothe refinancing in 2018 which will depend on the interest rate andcurrent market conditions. Most likely will issue another bond in 2H18 torefinance the bond but the amount is not confirmed. 2H18 is good timingbecause after summer is a good timing to get a better rate. Also in March 18, there is a RMB400m STN that will expire so we will likely repay usingown cash balance.
6. Strategy for the future. To diversify our earnings stream besides cementsuch as in aggregates but will look at opportunities in concrete, cementand concrete products which is what is done by global companies also.
7. Dividends. Payout policy is 25% for WCC though there is still a chanceto pay out higher dividends depending on the board. WCC also need toconsider whether they need to conserve cash for debt repayment or toconsolidate the market further.