Event

We cut Shanshui’s 14/15E ASP forecasts by 2/1% and unit costs by 3% p.a.

on lower coal price assumptions, resulting in a 2%/4% higher GP/t at Rmb61/62/t. Accordingly, we raise 14/15 EPS by 7%/ 18% and raise TP from HK$2.5to HK$3.5, based 5x 14/15E blended EV/EBITDA (vs. 4.3x previously as wetake account of more potential ASP upside in Shandong). Maintain Neutral.

We are turning less bearish on the Shandong market as supply/demanddynamics there improve. However, we are still bearish in the North East andShanxi region, given high supply additions and sluggish demand. We are alsoconcerned on the high gearing and receivables, increasing finance costs aswell as SG&A. Shanshui trades at 7x/6x 14/15E PE and 5.1/4.6x EV/EBITDA.

Impact

Shandong market bottoming but other regions remain weak: Shanshuiraised prices in Shandong by Rmb2/t in mid-Mar, 1 month earlier than usual.

There are only 2 new lines in the region and price coordination with CNBM isgoing well. While we are turning neutral on Shandong’s price outlook, we stillremain concerned on Liaoning and Shanxi (~40% of Shanshui’s capacity in2014), given ~14% supply additions there. The weak price in these 2 regionsshould offset Shandong’s rise; and we expect 1%y-y ASP drop in 2014.

Gearing to peak, yet still high: Shanshui plans to keep net gearing under160%, as it cut capex to Rmb2.1bn from Rmb4.2bn in 2013. Yet we see netgearing dropping only slightly, to 145% from 153% in 2013, still a relativelyhigh level for a non-SoE company. As Shanshui aims to pay off more debt,dividend payout ratio might remain low at ~25% vs. 30-40% before.

More concrete sales spark receivable risks: Shanshui plans to double itsconcrete capacity within two years due to its higher return on investment (only1.5 yrs to pay back vs. 3-5 yrs for cement). This could spark receivable risks –Shanshui had to make Rmb43mn bad debt provision in FY13.

Finance costs & SG&A to further increase: Shanshui is very vulnerable tohigher interest rates: each 25bps increase in interest rates will impact 14Eearnings by 2.4%. We expect net interest expense to jump 27% YoY in 14E toRmb1.2bn. We see selling expense to +17% YoY due to increased exportvolume (from 820kt to 1.2mnt), resulting in higher transportation costs.

Earnings and target price revision

Raise 14/15E EPS by 7/18%, TP to HK$3.5 from HK$2.5. Maintain NeutralPrice catalyst

12-month price target: HK$3.50 based on an EV/EBITDA methodology.

Catalyst: Cement price hike in ShandongAction and recommendation

While we are positive in Cement and turning neutral to Shandong, Shanshui isstill not our preferred pick due to our cautious view in Liaoning and Shanxiprices, concerns about its high gearing, AR risks. Maintain Neutral.

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