Industrials construction materials

Transcription

1 Industrials construction materials Elaine Lam* Analyst The Hongkong and Shanghai Banking Corporation Limited *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations 1

2 2 Sector structure Construction Construction materials Anhui Conch CNBM China Resources Cement Shanshui Cement China National Materials (Sinoma) Asia-Pacific Equity Research BBMG West China Cement TCC International Asia Cement China China Overseas Land China Resources Land Longfor Properties Shimao Property SOHO China Shui On Land Guangzhou R&F Agile Properties Real estate developers Infrastructure and real estate constructors China Railway Construction China Railway Group China Communications Construction China State Construction International Source: HSBC

3 Sector price history 160% Conch CNBM 140% CR Cement Shanshui Sinoma 120% TCCI AC China Series8 100% High corporate profitability w as driv en by strong demand and high cement ASP as a result of price coordination Share prices remained subdued in 1H12 mainly due to w eak dow nstream demand, competition and rainy w eather Asia-Pacific Equity Research 80% 60% Share prices mov ed up due to implementation of pow er cut measures beginning in July % 20% 0% -20% -40% -60% Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 3 Source: Thomson Reuters Datastream, HSBC

4 4 EBIT margin asset turnover ( ) 0.8 High asset turn efficient volume driven strategies ACC Shree Cements China National Material C China Shanshui Cement 14.5% Ultratech Cement Ambuja Cements Ltd High asset turn and high margins; profitable industry leaders strategies Anhui Conch Asia-Pacific Equity Research x Asset Turnover (x) 0.4 CNBM Asia Cement China China Resources Cement 0.3 TCC Intl Low ROA companies. Business restructuriung may be required High margins; niche players or brands with strong pricing power - 0% 5% 10% 15% 20% 25% EBIT Margin (%) Source: Thomson Reuters Datastream, HSBC

5 Sector description The construction material sector includes cement, aggregates, concrete and gypsum. The operations of leading cement producers in China range from the excavation of limestone to the production, sales and distribution of clinker, cement and concrete products. The major customers of cement producers are real estate and social housing developers as well as builders of highways, railways and other infrastructure. We estimate infrastructure, property and rural development account for 31%, 36% and 33% of total cement consumption in China, respectively. Elaine Lam* Analyst The Hongkong and Shanghai Banking Corporation Limited *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Building materials Cement is a high quality and cost-effective building material that is a key component of construction projects throughout the world. Various types of cement can be produced by grinding and mixing different proportions of clinker with gypsum, blast furnace slag and other additives. The most common types found in China are P.S32.5 (low-grade) and P.O42.5 (high-grade). The principal raw materials used in the production of Portland cement are limestone and clay. Other raw materials include gypsum, sand, shale, iron ore and blast furnace slag. Coal is the principal fuel used to provide the necessary heat for the kilns, while electricity is the main source of energy throughout the entire production process. Anhui Conch and China National Building Material Co (CNBM) are the national producers in China, with an especially strong presence in the eastern and south central regions. We estimate Conch s 2012 market share in Anhui and Jiangsu to be 39% and 15%, respectively, and CNBM s market share in Zhejiang and Jiangxi 60% and 29%. Regional companies such as China Resources Cement (Southern China), Sinoma (Northwest China) and Shanshui (Shandong) are also important players. Some of the building material manufactures also produce lightweight or high-tech building materials such as gypsum board, mineral fibre board and glass fibre. With the Chinese government advocating energy conservation, energy-saving building materials have also grown more popular. Examples include Beijing New Building Materials (CNBM s subsidiary) and Sinoma Science & Technology. Key themes Strict control on new capacity The restriction in approving new cement capacity in recent years has made the demand and supply balance much more favourable. Back in September 2009, the government promulgated Document 38 in order to restrict the approval of construction of new cement capacity. In 2010 the Ministry of Industry and Information Technology (MIIT) issued regulations which raised the entry barrier. As a result, it is very difficult to get approval for the construction of new plants or the expansion of production lines in provinces with new-dry process (NDP) clinker capacity of over 900kg per capita. Industry consolidation to favour major players Cement production of the top 10 players in China accounted for around 30% of the country s total, which is still below the government s target of 35% by Some of the major players have a history of growth through acquisitions. 5

6 Production discipline to support prices Given an improving demand and supply balance, cement companies have begun to adopt a price-costprofit business model, as opposed to the volume-cost-profit model used in the past. In other words, cement producers can achieve higher profitability through limiting production and price coordination. How well the coordination is implemented among the producers is thus a key factor to their profitability. Sector drivers Fixed asset investment Fixed asset investment is the key driver of sector earnings, especially in railway construction, social housing projects and real estate projects. Railway construction is likely to accelerate in 2H12 given that 80% of the suspended projects have resumed year-to-date, as reported by the local media. For social housing, China s Ministry of Housing and Urban and Rural Development (MOHURD) said the target for new starts and completed units for 2012 is 7m and 5m units, respectively (2011: 10.43m and 4.32m). Valuation Our target prices are PE-based, and our target multiples consider the stocks historical discounts to a major player s 10-year PE, largely in line with their historical average in the past 12 months. These historical average trading discounts reflect differences in the profitability of their operating regions and in financial leverage. Asia Construction materials : Growth and profitability (calendarised data) e 2012e Growth Sales 39.4% 10.5% 50.6% 42.7% 10.5% EBITDA 19.0% 18.1% 44.4% 64.9% -4.0% EBIT 9.2% 20.2% 41.5% 79.3% -7.8% Net profits 13.9% 19.8% 40.3% 76.5% -10.6% Margins EBITDA 20.9% 22.4% 21.4% 24.8% 21.5% EBIT 15.9% 17.3% 16.2% 20.4% 17.0% Net profit 11.7% 12.7% 11.8% 14.7% 11.9% Productivity Capex/sales 26% 18% 11% 8% 9% Asset turnover (x) 0.6x 0.5x 0.6x 0.6x 0.6x Net debt/equity 0.4x 0.5x 0.5x 0.7x 0.5x ROE 16% 15% 15% 21% 16% Note: based on all HSBC coverage of Construction materials companies across Asia. All data is market cap weighted Source: company data, HSBC estimates 6

7 Sector snapshot Key sector stats Construction materials 1% of MSCI Asia ex-jp Trading data ADTV (USDm) n/a Aggregated market cap (USDm) 34,273 Performance since 1 Jan 2000 Absolute 252% Relative to MSCI Asia 1.7x 3 largest stocks TAIWAN CEMENT, SEMEN GRESIK, ANHUI CONCH Correlations (5-year) with MSCI Asia 0.86 Source: MSCI, Thomson Reuters Datastream, Bloomberg, HSBC Top 10 stocks Core industry driver: China cement prices by region Cement ASP relativ e performance Source: Digital Cement, HSBC Northern Eastern South Central Western Jan- 11 Mar- May Jul- 11 Sep- Nov- Jan Mar- 12 Stock rank Stocks Index weight 1 TAIWAN CEMENT 10.8% 2 SEMEN GRESIK TERBUKA 10.7% 3 ANHUI CONCH CMT. 10.6% 4 SIAM CEMENT PCL.(THE) 10.4% 5 CHINA NAT.BLDG.MRA. 10.0% 6 ICT.TUNGGAL PRAKARSA TBK 7.8% 7 ASIA CEMENT 6.9% 8 ULTRATECH CEMENT 5.5% 9 AMBUJA CEMENTS 5.3% 10 CHINA SHANSHUI CMT 4.2% PE band chart Price level x 12x 8x 4x Country breakdown Country Weights (%) Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 China 32.9 Indonesia 18.5 Taiwan 17.7 Thailand 14.4 India 14.0 Malaysia 2.5 PB vs ROE (12-month forward) Dec-04 Nov-05 Oct-06 Sep-07 Aug-08 Jul-09 Jun-10 May-11 Apr-12 Fw d ROE % (LHS) Fwd PB (x) 7