Event
GiventheChineseNewYearholidaysinJan/Feb,ourJan2014CementSurveyshowedsentimenteasingfurtherto33vs.42inDec2013,thesecondconsecutivemonthofareadingbelow50.Thisiswithinourexpectationduetoseasonallyweakdemandin1Qaswellastheearlier-than-usualCNY,whichwouldcauseaslowdowninconstructionactivitiesfrommid-Jantomid-Feb.However,thisreadingisthehighestvs.abelow20figureforJanintheprevious2years.Ordersandpricingexpectationsdroppedasexpectedbututilizationremainedhighat75%,ledbyastrongSouthwest,EastandCentralSouth.Inventoryalsoremainsnearahistoriclowof56%(warehouseratio),whichprovidesagoodbackdropforpricehikesaftertheholidayseason.
Impact
SentimentdampensduetoCNY.SentimentofcementproducerscontinuestoeaseasexpectedduetoCNYwhereconstructionusuallycomestoahaltuntilmid-Feb.However,thereadingthismonthisstillmuchbetterthanseasonality,especiallyinEasternChinawheresentimentisstillpositive.
EastChinaawinner,followedbySouthwest.Overall,EasternChinaisthebest-performingregioninoursurveythismonth.Sentimentisthestrongestofallregionsduetolowinventory,goodpricecoordinationandlowsupplyaddition.ProducersintheSouthwestcloselyfollow.
Ruraldemandeased.Cementproducersareseeingasofteningofruralandpropertydemandprobablyduetothedepartureofhomeboundconstructionworkersfromthecities.Asexpected,generalinfrastructureconstructionalsoslowedbutweseesomeincreasingordersfromwaterrelatedinfrastructure.
Inventoryremainslow.Inventoryofproducersedgedup6pptsMoMtoanestimatedwarehouseratioof56%,nearthehistoriclowof50%lastmonth.InventoryregisteredanincreaseinallregionsexceptSouthwestChina.InventorywarehouseratiointheNorthwestjumpedalmost20pptsto80%.
Outlook
Weexpectaseasonalcorrectionincementandstockpricesinthenext1-2months,yetseethisasagoodopportunitytoaccumulatequalitynamessuchasConchandBBMG.Conch(914HK,OP,TP:HK$36.0)remainsourtoppickgiven~70%exposuretoourmostpreferredEast/South,biggestbeneficiaryofrecentpolicies,potentialM&Aupside,and6.5x14EEV/EBITDA.WelikeBBMG(2009HK,OP,TP:HK$8.0)duetofavourablelandconversionpoliciesandself-occupiedcommodityhousinginBeijing;wealsoseeimprovingcementsupply/demanddynamicsintheBeijing-Tianjin-Hebeiregion.MaintainOPonCRC(1313HK,OP,TP:HK$6.5)given~80%exposuretoCentralSouth,yetweexpectflatASPin2H14dueto2H13’shighbase.WeremaincautiousonCNBM(3323HK,N,TP:HK$8.0)duetolowvolumegrowth,highgearingandplacementriskwhenthepriceexceedsHK$8-8.5.SellShanshui(691HK,UP,TP:HK$2.5)onsluggishGP/tandhighgearing/financecosts,whichmakeitvulnerableamidatighteningcreditenvironment.