Operational update at post-results briefing on 25 March. Sales volume was largely stable y/y while the soften ASP has bounced back with resumed construction activity in March; currently, it’s RMB20-30/t lower than same period last year, implying a flat GP/t of RMB50-55 in the first two months. Coal costs have been falling to RMB615/t from RMB650/t. Infrastructure is the key demand driver, accounting for 40-45% of sales volume.
Management is targeting to sell 60-63mt of clinker/cement (or 10% y/y) with stable GP/t (RMB70/t), but confirmed that ASP in Shanxi is the major swing factor. Shanxi consolidation is critical. Management plans to have 53mt and 100mt of clinker and cement capacity by 2013 (36% and 12% y/y growth); new capacity is mainly from Shanxi (8mt) and Liaoning (1mt). Concrete capacity will lift from 16mm3 to 20mm3. Management said that acquisition costs have decreased from RMB450/t to RMB400/t. Capex is expected to reach RMB4bn, mainly for construction (75%), and then falling to RMB2bn in 2014. Total debt/EBITDA will maintain below 3.5x, which is a threshold set by credit rating agencies (S&P and Fitch). Dividend payout will in the range of 30-35% in future.
Earnings adjustment: We lowered our earnings estimates by 8.7% in 2013, factor in: a) 61.8mt of clinker/cement sales volume; new volume mainly from Shanxi, which all the new plants will commence operation before July 2013; b) softening GP/t of HKD66, largely due to diluting impact from Shanxi operation. All in all, we only estimate a 3.4% y/y earnings growth in 2013; however, earnings growth will resume to 17-20% y/y after the Shanxi market being consolidated in 2014/15.
Upgrade to OW(V). At HKD4.47, the stock trades at 5.9x PE or 1.0x PB in 2013. In our view, market is overly priced in earnings risk from Shanxi; it appears as a good entry point for long term investors. We adjusted down our PB-based target price from HKD6.5 to HKD6.2 following earnings revision. Our target PB multiple is a mid-cycle valuation, derived by Conch’s historical average in 2000-08(2.3x) and a 26% trading discount over the past four years.