Shanshui Cement announced 1H13 profit warning below expectations.Shanshui Cement announced 1H13 net profit might reduce no less thanthan 40%, below our and market expec tations. The Company explained thatthe snowy weather in Northeast China lasted longer than expected in 1H13,resulting in worse than expected ASP and sales in Liaoning and East InnerMongolia. We cut our 1H13 EPS estimates to RMB0.143, down 43% yoy.
Negative catalysts: 1) Leverage is too high. If Shanshui cut its capitalexpenditure in 2013 to RMB3.0bn, its net gearing ratio would soar to 166%in FY13. 2) Unexpected share placement might happen. If Shanshuicannot borrow more money from banks, it might announce an unexpectedshare placement and its EPS might be diluted by 15%-20%. 3) Shanshui’searnings are very sensitive to its borrowing rate. We assume that itsaverage borrowing rate in FY13 will reach 7.67%, up 0.25ppt yoy. However,if Shanshui’s average borrowing rate rises 0.5 ppt above our assumption, itsFY13 earnings will reduce by 7.0%.
Cut TP to HKD2.6 and reiterate “Reduce”. We revise down ourFY13-15EPS estimates by 34%, 30% and 21% to Rmb0.404, Rmb0.438and Rmb0.495. More negative catalysts might come from property tax,inflation hike and lower than expected 2014 GDP growth targets. Cut TP toHKD2.6, representing 5.0x 2013E PE, reflecting the Company’s high risk.Reiterate “Reduce”.