CHINA - Anhui Conch Cement policy tailwinds priced in

The coronavirus outbreak had a negative impact on Anhui Conch Cement's business operations in 1Q2020, but the company expects only a marginal -1.5% YoY decline in FY2020 cement and clinker sales volumes. Furthermore, cement prices in China seemed to have stabilised in the past few weeks and national average cement inventory levels have come down to more reasonable levels as well. The Chinese cement sector is a potential beneficiary of policy tailwinds, as the Chinese government could attempt to boost the economy with increased infrastructure spending to partially offset the negative economic impact of the coronavirus outbreak. Anhui Conch Cement is better-positioned than its peers to weather the current storm because its operations are focused in Eastern and Southern China where supply-demand dynamics are more favourable, and the company has a strong financial position with net cash accounting for about a fifth of its market capitalisation.

 

This is an update of on Anhui Conch Cement from January 2, 2020. Anhui Conch Cement's share price increased marginally by +1% from HK$56.80 as of December 31, 2019, to HK$57.45 as of April 17, 2020, since my initiation. Anhui Conch Cement has significantly outperformed the Hong Kong benchmark Hang Seng Index over the same period, as the Hang Seng Index is down by close to -14% year-to-date. This implies that policy tailwinds for Anhui Conch Cement have been priced in to a large extent, which explains my "Neutral" rating.

 

Anhui Conch Cement trades at 8.6 times consensus forward next twelve months' P/E versus its historical three-year and five-year mean consensus forward next twelve months' P/E multiples of 8.8 times and 9.7 times respectively. The stock also offers a consensus forward next twelve months' dividend yield of 2.5%.

 

Readers were advised to trade in Anhui Conch Cement shares listed on the Hong Kong Stock Exchange with the ticker 914:HK where average daily trading value for the past three months exceeds $70 million and market capitalisation is above $42 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers, Fidelity, Charles Schwab, or local brokers operating in their respective domestic markets.

 

Impact Of Coronavirus Outbreak

The current coronavirus outbreak has had a negative impact on most companies in various industries in different countries, and Mainland China cement producer Anhui Conch Cement is no exception.

 

At the company's FY2019 results briefing on March 23, 2020 (audio recording and transcript not publicly available), Anhui Conch Cement acknowledged that "the epidemic has a certain degree of impact on the company's business operations in the first quarter." Industry data shows a similar picture, with total cement production volume in China estimated to have decreased by -23.9% YoY to 299 million tonnes in 1Q2020.

 

In the company's FY2019 annual report released on April 8, 2020, Anhui Conch Cement suggested that factors such as "the continued decline in the growth rate of fixed asset investment, increased pressure on local governments to repay debts, insufficient funding for major engineering projects, and continued cooling in land purchases" could potentially have a negative impact on Chinese cement demand this year.

 

Nevertheless, Anhui Conch Cement is guiding for only a marginal -1.5% YoY decline in full-year cement and clinker sales volume from 323 million tonnes in FY2018 to 318 million tonnes in FY2019. The company also highlighted at the FY2019 results briefing that it has "fully resumed its business operations" as of late-March 2020. This is validated by Chinese government data that suggest that the work resumption rate of the Chinese cement industry was 94% as of early-April.

 

Cement Demand & Supply And Cement Prices

The national average selling price for cement in China has declined by approximately -8.5% from RMB470/tonne at the start of 2020 to around RMB430/tonne in April 2020. This is not surprising, as cement inventory levels in the country have increased from 50% in late-2019 to over 70% at the peak in February 2020. It is likely that weak cement demand and transportation issues as a result of the coronavirus outbreak contributed to the spike in national average cement inventory levels in early 2020. At the company's FY2019 results briefing on March 23, 2020, Anhui Conch Cement disclosed that the company's cement inventory level is, currently, in the 60-80% range. On the positive side of things, cement prices in China seemed to have stabilised in the past few weeks and national average cement inventory levels have come down to a more reasonable 60-65%.

 

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