Shanshui Cement 1H13 results were far below expectations. Revenue and net profit reached RMB7,069mn and RMB348mn, down 4.2% and 52.4% yoy. EPS only reached RMB0.123, down 52.4% yoy, far below expectations. Core net profit reached RMB263mn, down 60.3% yoy, far below expectations. Cement and clinker sales volume reached 25.2mn tonnes, up 7.8% yoy. Cement and clinker ASP reached Rmb241/t, down 12.5% yoy. Selling expenses to revenue and administrative expenses to revenue reached 2.5% and 7.2% respectively, up 0.8ppt and 3.0ppt yoy, far worse than expectations. Shanshui’s GP/t reached Rmb58/t, down 21.1% yoy.
Negative catalysts: Leverage is too high. Shanshui’s GP/t reached Rmb58/t, down 21.1% yoy. Its net debt reached RMB13,456mn, up 27.2% yoy. Net gearing ratio in 1H13 reached 149% and we expect to reach 178% at FY13 year end! As a non-SOE company, we think Shanshui cement might not borrow more money and it needs to cut its capex or sell assets to deleverage.
Maintain TP at HKD2.6 and downgrade to “Sell”. We revise down our FY13-15 EPS estimates to Rmb0.250, Rmb0.265 and Rmb0.305. Maintain TP at HKD2.6, representing 8.1x 2013E EPS and 11.3x 2013E core EPS, reflecting the Company’s high risk. Downgrade to “Sell”.