Research Report • Sector Research • Construction Materials
Construction Materials Monthly – July 2010
Gradual increase in allocation to
cement recommended
Cement: OUTPERFORM (Upgraded)
Glass: NEUTRAL (Reiterate)
17 Aug 2010
CSI Research Department
Pan Jianping
Tel: 021-68766893
Email: [email protected]
Business practice certificate no.:
S1010207110123
Performance relative to
indices
中标300
S&P/CITIC
300
非金建材
Non-metallic
construction
material
H股指数
H-share index
40
30
20
10
0
-10
090601 090806 091021 091228 100312 100521
Source: CSI
Investment Highlights:
 Cement industry review: Apparent consumption hit new high once again.
In Jun 10, nationwide cement output totaled 174m tonnes, up by a significant
14.59% YoY. It is worth noting that monthly output in Jun 10 hit a new high.
Investment data in relevant areas show that in Jun 10, monthly investment in
railway infrastructure amounted to Rmb59.7bn (+14% YoY). Transport FAI
amounted to Rmb131.29bn (+12% YoY), in line with our expectations.
Investment in real estate development performed well. However, with macro
controls continuing to be imposed on the real estate sector, the sustainability of
favourable data in the industry needs to be further observed. In terms of price,
the Jul 10 nationwide average price of cement slipped once again.
 Cement industry outlook: With off season coming to an end, there are
more pronounced differences in business climates across regions. With
the passage of the rainy season and the hottest weather, the off season in
sales is coming to an end. The variation in cement prices across regions will
become more pronounced. The negative factors that surfaced earlier still need
to be closely monitored. However, the added capital of Rmb60bn from the
central government will significantly boost confidence in meeting the goal on
welfare housing. The unprecedented intensity with which relevant policies are
being implemented will be helpful in easing the supply-demand tension in the
industry. The reinforcement of the development of the western region can
boost market confidence. A series of overlapping favourable factors is
gradually correcting the market’s overly pessimistic expectations on the
industry to a large extent.
 Cement industry investment strategy: Gradual increase in allocation.
Given our view of the demand and supply situation in the industry, we think that
the current industry valuation remains at a historical low. Recently, stimulated by
relevant policies such as: (i) welfare housing; (ii) elimination of obsolete
capacity; (iii) support for M&A and restructuring in the industry; and (iv)
development of the western region, the valuation of cement stocks has
recovered to a prospective 2010E PER range of 11-13x. Under an optimistic
scenario, we believe that the valuation of cement stocks can climb up to the
historical median PER of 15x in the short run. Additionally, based on our
consolidated view on the trend of the cement industry’s business climate in
4Q10E and 2011-12E in particular, we recommend investors gradually
increasing their allocation to cement stocks at this stage. Our key
recommendations are Gansu Qilianshan Cement, Jidong Cement, Anhui Conch
Cement (00914.HK), Tianshan Cement, China Shanshui (00691.HK) etc.
 Glass industry: Focus on industry leaders involved in the two themes of
“building energy conservation” and “new energy”. Policies on building
energy conservation may make substantive progress in the near-term, which
will inevitably boost the large-scale promotion of energy-saving glass
represented by LOW-E coated glass. The New Energy Revitalization Plan is
likely to be launched in Aug 10, which will undoubtedly create substantive
benefits to new energy-related glass companies. In sum, companies with rapid
development in new energy and energy conservation (such as China Aviation
Sanxin and Xinyi Glass (00868.HK)) look attractive in terms of mid-to-long term
investment value.
 New construction materials and non-metal new materials segments:
Focus on those that encompass the concepts of “low-carbon economy”
and “new energy”. As the “low-carbon economy”, with energy conservation
and reduced emissions as its core, gradually becomes the main theme in
economic development, “emerging industries” such as energy conservation
and new energy will experience a period of rapid development. We recommend
Beijing New Building Materials (“BNBM”) and Conch Profiles, which follow
the two main development themes and have good growth potential.
Peers’ Comparison – China Construction Materials Sector
PER (x)
Price
Company
(HK$)
09
Hong Kong -average
16
Anhui Conch (00914.HK)
26.20
23
CNBM (03323.HK)
13.70
12
Shanshui Cement (00691.HK)
4.37
15
Xinyi Glass (00868.HK)
3.57
16
SINOMA (01893.HK)
5.83
25
Asia Cement (00743.HK)
3.56
8
Shui On Cons (00983.HK)
9.45
5
TCC Int'l (01136.HK)
2.73
35
ChinaRes Cement (01313.HK)
3.81
10
BBMG (02009.HK)
9.94
14
Source: Respective companies, Bloomberg, CSI
10E
PEG (x) P/B (x) Yield (%) RoE (%)
11E
09-11E
10E
10E
12
9
0.5
1.7
1.8
16
13
0.7
2.5
1.2
11
9
0.7
1.8
0.8
11
9
0.5
1.8
2.3
9
7
0.3
2.2
4.1
15
11
0.5
2.0
1.1
10
9
NA
0.7
2.4
NA
NA
NA
NA
NA
9
7
0.3
0.9
2.3
14
9
NA
1.8
0.7
12
9
0.6
1.9
1.2
* Based on closing as of 16 Aug 2010
10E
15
17
19
18
25
14
7
NA
8
13
15
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Investment rating system
Performance of stock or sector relative to MSCI-China Index over next 6 months after research publications
Rating
Stock rating
Sector rating
地址：
Remark
Buy
Relative performance over MSCI-China Index >20%
Overweight
Relative performance over MSCI-China Index 5% ~ 20%
Hold
Relative performance over MSCI-China Index -10% ~ 5%
Sell
Relative performance over MSCI-China Index > -10%
NR
Not rated
Outperform
Relative performance over MSCI-China Index >10%
Neutral
Relative performance over MSCI-China Index -10% ~10%
Underperform
Relative performance over MSCI-China Index > -10%
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