We cut our 2013-15E earnings for Shanshui by 14-20% after trimming our 2013 ASP forecast by 5% to RMB253/tonne, given our year-to-date ASP estimate at below RMB250. Since our downgrade and earnings cuts earlier this year, its share price has dipped by half to an attractive valuation of 5.0x 2013E P/E at present. We upgrade the stock from HOLD to BUY with a lower target price of HK$4.30.
Cut 2013-15E Earnings by 14-20%
Based on the year-to-date operational data, we cut our 2013-15E earnings by 14-20% after lowering our 2013E ASP by 5% to RMB253/tonne, representing a 5% YoY decline, compared to the 10.2% YoY drop YTD in the Shandong market price. We also cut our 2013E gross profit per tonne (GP/t) from RMB73.0 to RMB65.7 accordingly, representing a 9.2% YoY decline. Despite our GP/t downgrade, we believe Shanshui’s exposure to Shandong is relatively defensive compared to other provinces in eastern China, thanks to the supply discipline and producers’ collective efforts to support the prices there.
The company’s 5M13 sales volume was on the right track, totalling 21.1mt (up 4.4% YoY) and accounting for 34% of our full-year forecast. High Market Concentration & Good Collaboration Matter
Shandong Province is well-known for its high market share concentration and thus good cooperation among producers in terms of supply control and pricing, unlike some provinces in eastern China (e.g. Anhui and Zhejiang) where large producers try to secure shipment by offering deep discounts. The two major cement producers in Shandong (totalling 60% market share in terms of clinker capacity), Shanshui Cement and China United, tend to smooth out cement price fluctuations via supply control.
Cheap Valuation with High Dividend Yield
Despite our earnings downgrade to 5-15% below consensus, we upgrade the stock from HOLD to BUY with a lower target price of HK$4.30. We see most negatives as priced in, as the stock is trading at only 5.0x 2013E P/E, 4.2x 2014E P/E, 0.8x 2013E P/B, 5.6x 2013E EV/EBITDA and US$55 EV/tonne, compared to the peer average of 6.7x and 5.4x 2013-14E P/E, 7.4x 2013E EV/EBITDA and US$71 EV/tonne.
On the other hand, the company provides an attractive dividend yield of 5.0- 7.1% in 2013-14E assuming the payout ratio at 25-30% (vs. company guidance of 25-35% and its historical minimum payout of 29% in 2011).