Increasing cost efficiencies are improving the structuralmargin

Our new target price of HKD7.4 is based on 1.46x FY14eEV/IC vs. HSBC’s old target price of HKD3.7, which wasbased on 1.1x FY15e EV/IC

We upgrade CR Cement to OW (remove the V-flag) fromUW(V)

We transfer coverage of CR Cement to Wei Sim from John Fraser-Andrews.

We have increased our target price for CR Cement to HKD7.4 from HKD3.7. This hasresulted in our upgrade to OW from UW(V).

Investment thesis: We think the company’s pricing power has improved and forecast fora 7.5% increase in ASPs in 2H13 vs. 1H13. Over the medium term, we expect margins tofurther improve from increasing cost efficiencies.

Valuation and risks: Our new target price is HKD7.4 per share, based on a 1.46x FY14eEV/IC multiple. This multiple is based on a 1.46x FY14e ROIC/WACC for the company,linearly interpolated against CR Cement’s historical ROIC/WACC and EV/IC trading andprofitability ranges. Previously, HSBC valued the stock using a target 2015e EV/ICmultiple of 1.1x before discounting back to present value at a WACC estimate of 7.3%.

This factored in the low ROIC recovery that was previously forecast for 2015. We haverevised the target price by switching from FY15e to FY14e EV/IC multiples as we thinkthis will better reflect the company’s valuation over the coming 12 months.

Under our research model, for stocks without a volatility indicator, the Neutral band is5ppts above and below the hurdle rate of 9.5% for China stocks. Our target price implies apotential return of 42.5% (including the forecast dividend yield), above the Neutral band;therefore, we are upgrading the stock to OW from UW(V). We remove the volatility flagin recognition of the stock’s historical volatility having stabilized.

Downside risks include poorer-than-forecast improvement in ASPs leading to worse-thanexpected profitability. In addition, the company’s regional concentration in South CentralChina means it is highly exposed to any decline in demand in the region.

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