Investment Highlights
2012 results largely in-line. Shanshui reported its 2012 results with net profit ofRmb1,519mn (-31.8% YoY), within ~1% variance to both our and consensusestimates. Blended cement/clinker ASP was Rmb267/t (-8.5% YoY) and salesvolume was 56.9m tonnes (+3.5% YoY), both also in-line with our estimates. GP/tcame in at Rmb72, slightly higher than our estimated Rmb71/t, supported by lowercoal prices. Higher-than-expected S,G&A expenses ratio and finance expenses werepartly compensated by higher other income and lower effective tax rate.
Discipline in Shandong still in good shape; risks from new markets/strategy. Westill expect a relatively good market discipline in Shandong in 2013E due to its highmarket concentration, which may further improve given attempts from some regions(like Zauzhuang) to promote increasing consolidations . An earlier price rebound wasseen in Shandong (in early Mar) by Rmb10-20/t for cement and Rmb30-40/t forclinker, compared to other regions in a generally slow demand recovery environment.This should help offset the increased fixed costs from extensive productionsuspension in Jan-Feb. Meanwhile, we are still concerned about the overhangsarising from: (i) increasing contribution from lower-margin areas of Shanxi andXinjiang; and (ii) more lower-margin clinker sales to Southern regions and overseas(15.9% of total 2012E sales volume vs. 16.6% in 1H12, which may further increase to17% in 2013E). We estimate 2013E GP/t at Rmb70, lower than that of 2012.
Gearing to stay high. Net gearing surged to 143.2% in 2012 (vs. 126.1% as atend-1H12 and 108.9% as at end-2011). With Rmb1.1bn cash on hand and Rmb4bnCAPEX plan for 2013E, net gearing is likely to stay high amid continuous debtfinancing. Meanwhile, Shanshui increased its dividend pay-out ratio to ~35% (from~25% in 2011).
Maintain OVERWEIGHT. We have fine-tuned our 2013-14E net profit forecasts by-1%. Meanwhile, due to increased debt impacting the equity value in our EV/tvaluation, we lower our TP to HK$5.50 from HK$5.80 based on 2013E EV/t ofRmb285 (close to the average level during the 2Q09-4Q10 up-cycle for cementprices, excluding the 1H11 period when the market was operating underexceptionally high cement prices). Our TP translates into a prospective 2013E PERof 7.6x. We remain relatively optimistic regarding its core markets, but areconservative on its new markets and strategy as well as the climbing gearing level.Recent news of NDRC investigation may also drag on the market sentiment in theshort run. Meanwhile, its cheap valuation of 2013E PER of 6.6x and EV/t of 267continues to support our OVERWEIGHT rating.