ItstimetotakeprofitincementstocksInthepast8weeks,cementsellingprices(Grade42.5)haveincreasedby30%(CNY82/t)inEastChinaand39%(CNY103/t)inSouthChina,andhasbeenthecatalystforthe+40%rallyincementstocks.WeattributetheriseinASP,whichwebelieveislikelytoretreatinlateNovember,to:1)seasonalimprovingdemandin4Q12,and2)deliberatepricecoordinationthattargetsahigherASP.Weexpectseasonaldemandgrowthtodeceleratefromlate-November,andwithcurrentcapacityutilisationslessthan70%,webelievefurtherproductioncutsareunlikelytogeneratehighercementprices.Weseethestockpricerisksignificantlyskewedtothedownside.WemaintainourReduceratingonAnhuiConch,asweexpectChinesecementpricestofallinlateNovember,actingasapotentialnegativeshare-pricecatalyst.
Weseeriskthemarkethasoverplayed4Q12"seasonalstrength";underlyingdemandremainsweakandovercapacityworseningWebelievethemarkethasfactoredintoomuchseasonalityintorealdemandimprovementandpotentialupsiderisksarelikelytobeoverstated.Inthisreport,wecomparedprevious4Q"peakseasons"forEastandSouthChina,aimingtobettergaugethedriverforthisroundofASPincreaseandthefuturepricetrend.Ourkeyfindingsare:1)demandgrowthisdeceleratingin4Q12,especiallyinEastandSouthChina;2)overcapacityhasworsenedtoover30%in2012Ffrom26%in2009;3)theASPincreasein4Q12sofarhasbeenmuchbetterthanpreviousperiodsundersimilarmarketconditions;and4)supplyconstraint(pricecoordination)isthemajordriverfor4Q12priceincreasebutisatriskifChinamacrodataimproves.
Action:AddAnhuiConch(914HK)toour"ImpactCall"list.ReiterateourReduceratingandTPofHKD18pershareAnhuiConchcurrentlytradesatHKD27.Whenittradedat~HKD27inSep11-Feb12,cementASPinEastChinawas+30%(CNY100/t)higherthancurrentlevels(Figure2).RelativetoASP,wethinkConchisasexpensiveasitwasinAug2011whenthesharepricereachedc.HKD40(Figure3).