State Council announcement - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2013/10/15/05de... · BNPP comments: Previously, when central government had approval authority, clinker

PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 15

State Council announcement

n Detailed policies to solve overcapacity problem The State Council has announced detailed actions to solve the overcapacity problem in China’s

cement sector. Key policies are: 1) local government bears the responsibility for capacity control;

2) existing older capacity is replaced with equal capacity or less; 3) tighter emission control; and 4) a

change in tax rebate policy to encourage the use of high-grade cement.

n Why this time is serious The State Council has made local government responsible for capacity and has changed the

appraisal factor from investment to emission and elimination targets. We see not only short-term

implications (ie power cuts) but also long-term controlling actions from devolving power and

responsibility to local government.

n Positive for cement companies under our coverage On a marketing trip to Singapore last week, we met with 15 investors. Their feedback on potential

policy changes regarding capacity elimination and tighter emission control was quite positive. Despite

a possible slowdown in demand growth, they felt improvements on the supply side should help big

players significantly. Their biggest doubt was whether the government would actually resolve

overcapacity through policy changes. The State Council announcement today suggests it will.

In our view, all the cement names under our coverage will benefit from the announced plans, since all

should see 1) increasing market share through the elimination of backward capacity, 2) strong pricing

power given limited new capacity growth, 3) potential increases in profit margin from changes in tax

rebate policy, and 4) better clinker utilisation rates.

Long term, Anhui Conch remains our top pick in the sector, as 1) it is the lowest cost producer, 2) it

has an improving demand and supply outlook in East China, 3) it has the most advanced technology

in de-NOx, 4) the lowest proportion of small clinker lines, 5) it will benefit from tighter emission control

in Zhujiang Delta and Changjiang Delta, and 6) it has the biggest portion of high-grade cement sales.

BNPP recommendations

Company BBG code Rating Share price Target price Upside/downside

Anhui Conch Cement 914 HK BUY 26.60 34.20 +28.6%

Shanshui Cement 691 HK BUY 3.16 3.90 +23.4%

CNBM 3323 HK BUY 7.82 9.50 +21.5%

CRC 1313 HK HOLD 5.30 4.84 -8.7%

Sinoma 1893 HK HOLD 1.70 1.53 -10.1%

Source: BNP Paribas

15 OCTOBER 2013

SECTOR REPORT

CHINA CEMENT

Rachel Cheung [email protected]

+852 2825 1824

Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for

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http://equities.bnpparibas.com/

China Cement Rachel Cheung

2 BNP PARIBAS 15 OCTOBER 2013

State Council announces detailed plans to solve overcapacity issue

Following the announcement of “Action Plan for Air Pollution and Control” on 12 Sep

2013 and “Draft Emission standard of air pollutants for cement industry” in March

2013, the State Council today announced a very detailed and solid by-sector plan to

impose strict control on production capacity of energy- and pollution-intensive

sectors, especially cement, steel, aluminium, flat glass, and ship building.

Suppress new capacity expansion and approval, local government to take the

lead and bear responsibility: The State Council orders co-operation among

provincial governments, the environment department, NDRC and MIIT to clean up

illegal and unregulated production lines. All provincial governments should take a

leading role to follow the rule of either “replacement with equal capacity” or

“replacement with reduced capacity”. For all new capacity applications, the provincial

government has to obtain consensus approval from NDRC, MIIT and the

environment department. Otherwise, construction will be stopped immediately and

no more financial support provided, and the details of the unregulated projects will be

revealed to the public. In addition, local governors who fail to control the process

would be penalised.

BNPP comments: Previously, when central government had approval authority,

clinker line construction took place in many provinces. Central government lacked

the ability to strictly control clinker capacity. In fact, many local governments even

welcomed clinker line construction as a way of attracting investment. However,

things have changed in Xinjiang, Chongqing, Zhejiang, Jiangsu, Beijing-Tianjin-Hebei

and Qinghai, as provincial governments stopped approving new clinker line

construction in 2011.Capacity expansion has been effectively controlled in these

provinces, proving that overcapacity can be addressed when local governments take

action and bear the responsibility. Therefore, we expect to see better control over

capacity elimination once local governments take a leading role in addressing the

issue.

Backward capacity elimination: The backward capacity elimination target in the

12th FYP should be achieved by end-2014, one year ahead of schedule. The State

Council will implement detailed plans to carry out its rule of “replacement with equal

capacity” or “replacement with reduced capacity” and reward any local government

that accelerates the elimination of backward capacity ahead of plan. By 2015, 100mt

(5-8% of capacity) of clinker and corresponding grinding capacity should be

eliminated. SOE producers should lead by example.

BNPP comments: To our knowledge, there is around 100mt of cement and clinker

backward capacity remaining in China now. We believe a potentially higher than

target elimination would erode some of the small NSP clinker lines (



EXHIBIT 3: 2500t/d lines closures would have little impact on our top pick

2012 >5000t/d as % of capacity

Anhui Conch 90

CR Cement 67

Shanshui 52

CNBM 47

Sinoma 24

Sources: Company data; BNP Paribas

Tighter emission control’ more serious in Beijing-Tianjin-Hebei region,

Changjiang Delta, Zhujiang Delta: The State Council will announce new emission

standards for respective high pollution sectors. Failure to meet the standard within

the deadline will result in higher electricity and water prices, etc. For highly polluted

and sensitive regions like Beijing-Tianjin-Hebei, Changjiang Delta and Zhujiang

Delta, the “replacement with reduced capacity” rule must be applied. The local

government needs to be very transparent in its capacity replaced/eliminated list.

BNPP Comments: We published a comprehensive report on the potential impact of

tighter emission control on China’s cement sector in May 2013, where we concluded

that big cement players would see less of a cost increase to de-NOx compared with

smaller players due to economies of scale. We expect the new standards for the

cement sector to be announced in Oct-Nov 2013. Currently, around 10% of total

clinker lines in China have installed de-NOx facilities, and we expect to see 100%

implementation by end-2015.

Tighter emission control has been enforced in Shijiazhuang, Hefei and Chaohu:

small grinding stations in Shijiazhuang were closed on 15 October, and some lines at

large producers are undergoing maintenance. 50% of clinker production has stopped

from 10 Oct – 10 Nov. It’s not uncommon for local governments to disrupt production

in high energy-consuming sectors in order to meet short-term targets (eg power

rationing in 2010 to meet energy saving target). However, we see long-term

implications from the current action as well.

EXHIBIT 4: SNCR Installation capex and unit costs

Source: BNP Paribas

EXHIBIT 5: Electric vs Bag dust collectors

Source: BNP Paribas



Encourage the production of high grade cement through changes in tax rebate

policy: The State Council plans to accelerate the implementation of favourable tax

policy to encourage the use of high grade cement (PO 42.5) and reduce the

proportion of PC 32.5.

BNPP comments: Currently, the low grade cement PC 32.5 accounts for 65-70% of

total cement production in China and PC 32.5 producers enjoy a 17% VAT tax

rebate, while PO 42.5 has no tax benefit at all; producers of low grade cement thus

earn higher margins than high grade cement producers. Changes to this policy in

particular would significantly increase the competitive advantage of big cement

players, which account for most of the clinker supply. Meanwhile, small grinding

stations are likely to be eliminated or acquired by big clinker producers.

EXHIBIT 6: High grade and low grade cement summary

P.C32.5 P.O42.5

Whether enjoy VAT rebate Yes No

Current effective VAT rate 0% 17%

Proportion of clinker in raw materials 80%

Share in cement consumption 65-70% 30-35%

Probable change in tax Lower rebate Likely to enjoy rebate

Sources: Dcement; BNP Paribas

Detailed guidance from the State Council announcement

EXHIBIT 7: State Council detailed guidance to solve overcapacity issue

Policy and administration To revise and improve industry policy and standards; and strengthen market entry control in overcapacity sectors. Lists of backward capacity elimination should be published on a regular basis.

Environmental protection To strengthen environmental protection: speed up drafting of emission standards, esp. in Beijing-Tianjin-Hebei; keep close watch on overcapacity and stop or close enterprises that violate environmental protection regulations.

Land Use To strengthen management of land and coasts: A thorough check on land use should be conducted for overcapacity sectors; no land approval for illegal construction in overcapacity sectors.

Financing To implement differentiated financing policy: no loans, bonds, equity financing support for construction projects without proper legal permission; while provide credit for M&As

Pricing To implement discrepancy electricity pricing and punitive water pricing for cement sector.

Tax To expand fiscal support for backward capacity elimination; revise tax policy to encourage M&A; revise resource recycle tax rebate to support high grade cement, high quality RMC and waste treatment.

Employee placement Local governments should take care of employees laid off in backward capacity elimination process.

Information transparency To set up a public database to facilitate regulation and supervision.

Supervision Include resolving overcapacity into local gov't KPI. Officials in charge will take responsibility for any failures in supervising illegal construction.

Sources: State Council; BNP Paribas

Stock recommendations

The feedback from investors in Singapore last week regarding potential policies on

capacity elimination and tighter emission control was quite positive. Despite a

possible slowdown in demand growth, they felt improvements on the supply side

should help big players significantly. Their biggest doubt was whether the

government would actually resolve overcapacity through policy changes. The State

Council announcement today suggests it will.

In our view, all the cement names under our coverage will benefit from the

announced plans, since all should see 1) increasing market share through the

elimination of backward capacity, 2) strong pricing power given limited new capacity

growth, 3) potential increases in profit margin from changes in tax rebate policy, and

4) better clinker utilisation rates.

Long term, Anhui Conch remains our top pick in the sector, as 1) it is the lowest cost

producer, 2) it has an improving demand and supply outlook in East China, 3) it has

the most advanced technology in de-NOx, 4) the lowest proportion of small clinker

lines, 5) it will benefit from tighter emission control in Zhujiang Delta and Changjiang

Delta, and 6) it has the biggest portion of high-grade cement sales (60-70%).



Financial statements Anhui Conch Cement

Profit and Loss (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Revenue 48,654 45,766 52,737 57,624 61,365

Cost of sales ex depreciation (27,010) (30,149) (33,099) (35,983) (37,711)

Gross profit ex depreciation 21,644 15,617 19,638 21,641 23,654

Other operating income 1,028 1,102 1,055 1,152 1,227

Operating costs (3,658) (4,458) (5,137) (5,613) (5,978)

Operating EBITDA 19,014 12,261 15,556 17,180 18,904

Depreciation (2,467) (3,115) (3,449) (3,761) (3,988)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 16,547 9,145 12,107 13,420 14,916

Net financing costs (625) (997) (925) (877) (742)

Associates 27 (23) (23) (23) (23)

Recurring non operating income 0 0 0 0 0

Non recurring items 0 0 0 0 0

Profit before tax 15,948 8,126 11,159 12,519 14,151

Tax (3,880) (1,639) (2,567) (2,879) (3,255)

Profit after tax 12,068 6,487 8,592 9,640 10,896

Minority interests (233) (156) (206) (231) (261)

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 11,836 6,331 8,386 9,409 10,635

Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 11,836 6,331 8,386 9,409 10,635

Per share (RMB)

Recurring EPS * 2.23 1.19 1.58 1.78 2.01

Reported EPS 2.23 1.19 1.58 1.78 2.01

DPS 0.38 0.21 0.27 0.31 0.35

Growth

Revenue (%) 41.0 (5.9) 15.2 9.3 6.5

Operating EBITDA (%) 80.4 (35.5) 26.9 10.4 10.0

Operating EBIT (%) 92.4 (44.7) 32.4 10.8 11.1

Recurring EPS (%) 91.0 (46.5) 32.5 12.2 13.0

Reported EPS (%) 91.0 (46.5) 32.5 12.2 13.0

Operating performance

Gross margin inc depreciation (%) 39.4 27.3 30.7 31.0 32.0

Operating EBITDA margin (%) 39.1 26.8 29.5 29.8 30.8

Operating EBIT margin (%) 34.0 20.0 23.0 23.3 24.3

Net margin (%) 24.3 13.8 15.9 16.3 17.3

Effective tax rate (%) 24.3 20.2 23.0 23.0 23.0

Dividend payout on recurring profit (%) 16.8 17.2 17.2 17.2 17.2

Interest cover (x) 26.5 9.2 13.1 15.3 20.1

Inventory days 46.4 50.9 45.5 45.3 47.5

Debtor days 65.1 77.1 59.3 58.8 60.6

Creditor days 61.4 61.8 57.8 57.6 60.3

Operating ROIC (%) 26.7 13.3 16.0 16.8 18.3

ROIC (%) 22.7 11.2 13.4 14.1 15.4

ROE (%) 29.9 13.6 16.9 16.9 16.4

ROA (%) 17.4 8.5 10.5 10.7 10.7

*Pre exceptional, pre-goodwill and fully diluted

Revenue By Division (RMB m) 2011A 2012A 2013E 2014E 2015E

Grade 42.5 26,600 25,819 31,184 33,504 35,824

Grade 32.5 12,714 13,006 15,709 16,878 18,047

Clinker 8,832 7,781 9,398 10,097 10,796

Others 507 (840) (3,554) (2,855) (3,302)

Sources: Anhui Conch Cement; BNP Paribas estimates



Financial statements Anhui Conch Cement

Cash Flow (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E


Depreciation 2,467 3,115 3,449 3,761 3,988

Associates & minorities 206 178 229 254 284

Other non-cash items (2,235) (1,393) 0 0 0

Recurring cash flow 12,273 8,232 12,064 13,423 14,908

Change in working capital (3,550) 823 (260) (536) (382)

Capex - maintenance (1,676) (715) 0 0 0

Capex - new investment (7,254) (6,157) (12,000) (4,000) (4,000)

Free cash flow to equity (207) 2,183 (196) 8,888 10,525

Net acquisitions & disposals 0 0 0 0 0

Dividends paid (1,994) (1,089) (1,443) (1,619) (1,830)

Non recurring cash flows (1,238) (1,598) (140) (147) (155)

Net cash flow (3,438) (504) (1,780) 7,122 8,541

Equity finance 0 0 0 0 0

Debt finance 8,368 727 0 0 0

Movement in cash 4,929 223 (1,780) 7,122 8,541

Per share (RMB)

Recurring cash flow per share 2.32 1.55 2.28 2.53 2.81

FCF to equity per share (0.04) 0.41 (0.04) 1.68 1.99

Balance Sheet (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Working capital assets 18,251 15,497 16,258 18,188 19,596

Working capital liabilities (13,794) (11,863) (12,364) (13,759) (14,784)

Net working capital 4,457 3,634 3,894 4,430 4,812

Tangible fixed assets 48,804 52,607 56,159 58,398 57,910

Operating invested capital 53,261 56,241 60,053 62,828 62,721

Goodwill 1,797 1,901 1,901 1,901 1,901

Other intangible assets 0 0 0 0 0

Investments 923 2,805 2,945 3,092 3,247

Other assets 3,579 3,297 3,297 3,297 3,297

Invested capital 62,240 67,536 71,487 74,410 74,458

Cash & equivalents (7,969) (8,125) (6,470) (13,696) (22,325)

Short term debt 3,197 2,658 2,658 2,658 2,658

Long term debt * 19,239 21,080 21,080 21,080 21,080

Net debt 14,467 15,613 17,268 10,042 1,414

Deferred tax 446 347 382 420 462

Other liabilities 474 418 418 418 418

Total equity 44,457 48,538 50,594 60,473 68,846

Minority interests 1,992 2,266 2,472 2,703 2,964


* includes convertibles and preferred stock which is being treated as debt

Per share (RMB)

Book value per share 8.39 9.16 9.55 11.41 12.99

Tangible book value per share 7.54 8.18 8.57 10.43 12.01

Financial strength

Net debt/equity (%) 31.1 30.7 32.5 15.9 2.0

Net debt/total assets (%) 17.2 17.8 19.1 9.9 1.3

Current ratio (x) 1.5 1.6 1.5 1.9 2.4

CF interest cover (x) 12.3 9.4 13.8 15.7 20.6

Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 9.4 17.6 13.3 11.8 10.5

Recurring P/E @ target price (x) * 12.1 22.6 17.0 15.2 13.4

Reported P/E (x) 9.4 17.6 13.3 11.8 10.5

Dividend yield (%) 1.8 1.0 1.3 1.5 1.6

P/CF (x) 9.1 13.5 9.2 8.3 7.5

P/FCF (x) (537.7) 50.9 (566.2) 12.5 10.6

Price/book (x) 2.5 2.3 2.2 1.8 1.6

Price/tangible book (x) 2.8 2.6 2.4 2.0 1.7

EV/EBITDA (x) ** 6.6 10.5 8.4 7.4 6.3

EV/EBITDA @ target price (x) ** 8.3 13.1 10.4 9.3 8.0

EV/invested capital (x) 2.1 1.9 1.8 1.7 1.6

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

Sources: Anhui Conch Cement; BNP Paribas estimates



Financial statements Shanshui Cement


Revenue 16,862 16,161 16,369 17,250 17,342



Other operating income 183 289 289 289 289

Operating costs (1,405) (1,301) (1,539) (1,570) (1,578)


Depreciation (907) (1,099) (1,175) (1,270) (1,294)


Operating EBIT 3,856 3,099 2,665 2,837 3,031

Net financing costs (620) (925) (1,018) (1,074) (1,038)

Associates 17 31 31 31 31




Tax (942) (601) (571) (574) (648)

Profit after tax 2,312 1,604 1,108 1,220 1,377







Per share (RMB)

Recurring EPS * 0.79 0.54 0.37 0.41 0.46

Reported EPS 0.79 0.54 0.37 0.41 0.46

DPS 0.20 0.19 0.13 0.14 0.16

Growth

Revenue (%) 42.2 (4.2) 1.3 5.4 0.5

Operating EBITDA (%) 86.5 (11.9) (8.5) 6.9 5.3

Operating EBIT (%) 123.4 (19.6) (14.0) 6.4 6.9

Recurring EPS (%) 126.3 (31.8) (30.9) 10.2 12.8

Reported EPS (%) 126.3 (31.8) (30.9) 10.2 12.8





Net margin (%) 13.2 9.4 6.4 6.7 7.5



Interest cover (x) 6.3 3.4 2.6 2.7 3.0

Inventory days 51.4 62.0 57.6 55.3 57.7

Debtor days 55.9 75.4 75.0 71.8 73.7

Creditor days 148.1 144.9 138.0 132.4 138.1

Operating ROIC (%) 29.4 18.2 13.2 13.5 14.9

ROIC (%) 25.9 16.0 11.5 11.9 13.1

ROE (%) 33.2 18.6 12.1 12.7 13.2

ROA (%) 13.3 9.5 7.3 7.6 7.7



Cement 14,124 13,262 13,498 14,286 14,375

Clinker 1,887 2,030 1,991 2,047 2,047

RMC 243 465 448 461 461

Others 609 404 432 455 458

Sources: Shanshui Cement; BNP Paribas estimates



Financial statements Shanshui Cement



Depreciation 907 1,099 1,175 1,270 1,294


Other non-cash items 1,553 1,514 1,620 1,679 1,717


Change in working capital (3,206) (2,255) (2,180) (1,679) (1,745)

Capex - maintenance (2,219) (4,194) (3,500) (500) (500)

Capex - new investment 0 0 0 0 0

Free cash flow to equity (670) (2,263) (1,808) 1,959 2,111


Dividends paid 0 0 0 0 0

Non recurring cash flows (1,152) (146) 18 31 66

Net cash flow (1,821) (2,410) (1,790) 1,990 2,177


Debt finance 3,687 485 1,337 (404) (456)

Movement in cash 1,866 (1,925) (453) 1,585 1,721

Per share (RMB)


FCF to equity per share (0.24) (0.80) (0.64) 0.70 0.75







Goodwill 1,298 1,833 1,833 1,833 1,833

Other intangible assets 390 473 406 340 273

Investments 161 768 768 768 768

Other assets 144 167 167 167 167


Cash & equivalents (3,008) (1,083) (631) (2,216) (3,937)

Short term debt 3,268 2,988 2,988 2,988 2,988

Long term debt * 8,197 10,478 12,182 12,182 12,182

Net debt 8,457 12,383 14,540 12,954 11,233

Deferred tax 83 60 60 60 60


Total equity 7,709 8,651 8,725 9,476 10,323

Minority interests 458 746 805 869 943



Per share (RMB)



Financial strength

Net debt/equity (%) 103.6 131.8 152.6 125.2 99.7


Current ratio (x) 1.2 1.1 1.1 1.3 1.5

CF interest cover (x) (0.1) (1.4) (0.8) 2.8 3.0

Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 3.2 4.6 6.7 6.1 5.4


Reported P/E (x) 3.2 4.6 6.7 6.1 5.4

Dividend yield (%) 7.9 7.5 5.2 5.8 6.5

P/CF (x) 1.5 1.7 1.8 1.7 1.6

P/FCF (x) (10.5) (3.1) (3.9) 3.6 3.3

Price/book (x) 0.9 0.8 0.8 0.7 0.7


EV/EBITDA (x) ** 3.1 4.3 5.5 5.2 4.6




Sources: Shanshui Cement; BNP Paribas estimates



Financial statements CNBM


Revenue 80,058 87,218 113,514 121,855 121,402



Other operating income 2,993 5,200 3,300 3,543 3,529

Operating costs (6,823) (9,356) (13,917) (14,931) (14,876)


Depreciation (2,605) (3,925) (5,180) (5,895) (6,292)


Operating EBIT 17,487 15,972 17,693 19,418 19,694

Net financing costs (3,859) (6,507) (8,728) (9,235) (9,192)

Associates 686 459 459 459 459




Tax (3,569) (2,187) (2,167) (2,447) (2,520)

Profit after tax 10,746 7,737 7,257 8,194 8,440

Minority interests (2,731) (2,157) (1,923) (2,166) (2,235)






Per share (RMB)

Recurring EPS * 1.98 1.03 0.99 1.12 1.15

Reported EPS 1.98 1.03 0.99 1.12 1.15

DPS 0.22 0.15 0.15 0.17 0.17

Growth

Revenue (%) 54.0 8.9 30.1 7.3 (0.4)


Operating EBIT (%) 106.1 (8.7) 10.8 9.7 1.4

Recurring EPS (%) 125.1 (47.8) (4.4) 13.0 2.9

Reported EPS (%) 125.1 (47.8) (4.4) 13.0 2.9





Net margin (%) 10.0 6.4 4.7 4.9 5.1



Interest cover (x) 4.7 2.5 2.1 2.2 2.2

Inventory days 54.9 63.3 61.3 68.3 75.9

Debtor days 91.3 143.4 161.3 178.1 196.2

Creditor days 144.7 211.1 237.1 264.0 293.5

Operating ROIC (%) 19.7 12.9 10.7 10.6 10.3

ROIC (%) 14.0 8.7 7.3 7.4 7.3

ROE (%) 35.2 19.6 16.3 16.0 14.5

ROA (%) 10.1 6.3 5.4 5.4 5.2



Cement Segment 67,549 67,549 102,311 101,858 101,858

Lightweight Building Materials Segment 6,635 6,635 6,557 6,557 6,557

Glass Fiber and FRP Products Segment 2,195 2,195 2,148 2,148 2,148

Engineering Segment 6,067 6,067 6,067 6,067 6,067

Others 4,700 4,771 4,771 4,771 4,771

Sources: CNBM; BNP Paribas estimates



Financial statements CNBM



Depreciation 2,605 3,925 5,180 5,895 6,292

Associates & minorities 2,045 1,699 1,465 1,707 1,776

Other non-cash items (3,606) (1,741) 0 0 0


Change in working capital (389) (5,134) (2,117) (2,191) (499)

Capex - maintenance 0 0 0 0 0


Free cash flow to equity (13,375) (21,064) (15,139) 439 4,774


Dividends paid (1,161) (837) (800) (904) (931)

Non recurring cash flows (1,047) 1,104 0 0 0

Net cash flow (15,583) (20,797) (15,939) (466) 3,843


Debt finance 19,549 34,450 8,000 7,000 0

Movement in cash 3,966 13,653 (7,939) 6,534 3,843

Per share (RMB)


FCF to equity per share (3.30) (3.90) (2.80) 0.08 0.88







Goodwill 14,901 31,002 31,002 31,002 31,002

Other intangible assets 7,899 11,668 11,668 11,668 11,668

Investments 5,573 7,244 7,703 8,162 8,620

Other assets 7,821 10,174 10,174 10,174 10,174



Short term debt 53,118 90,752 90,752 90,752 90,752

Long term debt * 32,748 51,865 59,865 66,865 66,865

Net debt 72,564 128,763 144,702 145,168 141,325

Deferred tax 1,426 1,985 1,985 1,985 1,985

Other liabilities 2,161 3,575 3,575 3,575 3,575

Total equity 26,332 30,496 35,029 40,153 45,427




Per share (RMB)


Tangible book value per share 0.26 (2.89) (2.05) (1.10) (0.12)

Financial strength

Net debt/equity (%) 192.9 300.5 286.4 251.1 216.4


Current ratio (x) 0.6 0.5 0.5 0.6 0.6


Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 3.1 6.0 6.2 5.5 5.4


Reported P/E (x) 3.1 6.0 6.2 5.5 5.4

Dividend yield (%) 3.5 2.5 2.4 2.7 2.8

P/CF (x) 2.8 3.5 2.8 2.4 2.3

P/FCF (x) (1.9) (1.6) (2.2) 75.9 7.0

Price/book (x) 1.3 1.1 1.0 0.8 0.7

Price/tangible book (x) 24.1 (2.1) (3.0) (5.6) (50.2)

EV/EBITDA (x) ** 4.6 7.2 7.9 7.6 7.4




Sources: CNBM; BNP Paribas estimates



Financial statements China Resources Cement

Profit and Loss (HKD m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Revenue 23,240 25,345 27,402 29,494 31,485



Other operating income 536 354 454 454 454

Operating costs (2,546) (3,023) (3,277) (3,527) (3,765)


Depreciation (1,302) (2,179) (2,427) (2,663) (2,832)


Operating EBIT 5,214 3,431 3,842 4,092 4,452

Net financing costs (597) (913) (852) (872) (820)

Associates 289 218 218 218 218




Tax (562) (528) (706) (859) (963)

Profit after tax 4,345 2,208 2,503 2,578 2,888







Per share (HKD)

Recurring EPS * 0.64 0.34 0.38 0.39 0.44

Reported EPS 0.64 0.34 0.38 0.39 0.44

DPS 0.06 0.07 0.07 0.07 0.08

Growth

Revenue (%) 64.3 9.1 8.1 7.6 6.8


Operating EBIT (%) 113.5 (34.2) 12.0 6.5 8.8

Recurring EPS (%) 104.8 (47.7) 13.4 3.0 12.0

Reported EPS (%) 104.8 (47.7) 13.4 3.0 12.0





Net margin (%) 18.0 8.6 9.1 8.7 9.1



Interest cover (x) 9.2 4.0 4.8 4.9 5.7

Inventory days 43.1 49.4 55.4 62.5 63.2

Debtor days 61.2 68.5 77.2 87.6 87.6

Creditor days 193.5 176.7 201.3 243.0 245.9

Operating ROIC (%) 22.0 11.6 12.4 13.1 14.3

ROIC (%) 17.7 9.3 9.9 10.3 11.1

ROE (%) 24.5 10.8 11.1 10.5 10.8

ROA (%) 11.5 6.1 6.1 5.9 6.0


Revenue By Division (HKD m) 2011A 2012A 2013E 2014E 2015E

Cement 16,328 18,125 20,500 21,724 23,718

Clinker 1,969 2,247 1,710 1,716 1,714

Concrete 4,944 4,973 5,193 6,054 6,054

Others 0 0 0 0 0

Sources: CRC; BNP Paribas estimates



Financial statements China Resources Cement

Cash Flow (HKD m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E


Depreciation 1,302 2,179 2,427 2,663 2,832


Other non-cash items 642 895 845 866 813


Change in working capital (2,316) 328 (1,881) (27) (62)

Capex - maintenance (8,392) (3,660) (4,280) (3,720) (2,000)

Capex - new investment 0 0 0 0 0

Free cash flow to equity (4,419) 1,950 (386) 2,360 4,470

Net acquisitions & disposals (3,171) (1,239) 0 0 0

Dividends paid (391) (442) (471) (486) (544)

Non recurring cash flows 0 0 0 0 0

Net cash flow (7,981) 270 (858) 1,874 3,926

Equity finance (619) 0 0 0 0

Debt finance 8,193 (2,717) 1,000 0 0

Movement in cash (408) (2,447) 142 1,874 3,926

Per share (HKD)


FCF to equity per share (0.68) 0.30 (0.06) 0.36 0.69

Balance Sheet (HKD m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E



Net working capital (2,014) (638) (2,645) (2,895) (3,142)



Goodwill 0 0 0 0 0


Investments 5,535 5,413 5,419 5,426 5,433

Other assets 0 0 0 0 0



Short term debt 11,377 8,993 10,011 10,011 10,011

Long term debt * 10,035 13,270 10,170 10,170 10,170

Net debt 17,675 18,702 17,409 16,253 12,977

Deferred tax 103 114 114 114 114


Total equity 19,299 21,376 23,385 25,455 27,774

Minority interests 603 583 605 628 653



Per share (HKD)



Financial strength

Net debt/equity (%) 88.8 85.2 72.6 62.3 45.7


Current ratio (x) 0.5 0.6 0.6 0.6 0.8

CF interest cover (x) (6.4) 3.1 0.5 3.7 6.5

Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 8.3 15.8 13.9 13.5 12.1


Reported P/E (x) 8.3 15.8 13.9 13.5 12.1

Dividend yield (%) 1.1 1.3 1.4 1.4 1.6

P/CF (x) 5.5 6.5 6.0 5.7 5.3

P/FCF (x) (7.8) 17.7 (89.4) 14.6 7.7

Price/book (x) 1.8 1.6 1.5 1.4 1.2


EV/EBITDA (x) ** 7.1 9.2 8.2 7.5 6.6




Sources: CRC; BNP Paribas estimates



Financial statements Sinoma


Revenue 50,719 46,273 52,052 57,763 65,701



Other operating income 799 1,336 650 650 650

Operating costs (5,519) (6,095) (6,241) (6,841) (7,647)


Depreciation (1,946) (2,735) (3,431) (3,813) (4,185)


Operating EBIT 6,086 3,591 3,923 4,211 4,848

Net financing costs (1,331) (1,521) (1,166) (1,124) (1,067)

Associates 130 7 8 8 8




Tax (920) (511) (802) (897) (1,099)

Profit after tax 3,965 1,566 1,963 2,197 2,690

Minority interests (2,502) (1,092) (1,426) (1,629) (1,973)



Reported net profit 1,463 474 537 569 717


Recurring net profit 1,463 474 537 569 717

Per share (RMB)

Recurring EPS * 0.41 0.13 0.15 0.16 0.20

Reported EPS 0.41 0.13 0.15 0.16 0.20

DPS 0.06 0.02 0.02 0.02 0.03

Growth

Revenue (%) 14.0 (8.8) 12.5 11.0 13.7


Operating EBIT (%) 21.9 (41.0) 9.2 7.3 15.1

Recurring EPS (%) 33.0 (67.6) 13.3 5.9 26.2

Reported EPS (%) 33.0 (67.6) 13.3 5.9 26.2





Net margin (%) 2.9 1.0 1.0 1.0 1.1



Interest cover (x) 4.7 2.4 3.4 3.8 4.6

Inventory days 65.0 86.0 79.2 75.8 74.5

Debtor days 94.5 128.2 118.1 113.5 111.8

Creditor days 209.4 247.4 234.4 224.4 220.5

Operating ROIC (%) 16.3 6.7 5.9 5.6 6.1

ROIC (%) 13.1 5.6 5.0 4.8 5.3

ROE (%) 14.1 4.3 4.7 4.8 5.7

ROA (%) 6.9 3.3 3.0 2.9 3.1



Cement equipment and engineering services 24,290 19,749 24,022 26,584 33,921

Glass fiber 2,927 2,894 2,802 2,802 2,802

Cement 20,234 20,453 21,684 24,832 25,433

High-tech materials 3,267 3,935 3,545 3,545 3,545

Sources: Sinoma; BNP Paribas estimates



Financial statements Sinoma


Recurring net profit 1,463 474 537 569 717

Depreciation 1,946 2,735 3,431 3,813 4,185

Associates & minorities 2,372 1,085 1,419 1,621 1,965

Other non-cash items 116 (83) (180) (214) (237)


Change in working capital (6,849) 1,428 (41) 82 (193)

Capex - maintenance 0 0 0 0 0


Free cash flow to equity (8,828) (3,776) (4,834) (2,130) 1,438

Net acquisitions & disposals (130) (127) 0 0 0

Dividends paid (143) (214) (69) (79) (83)

Non recurring cash flows (376) (506) (379) (384) (384)

Net cash flow (9,477) (4,623) (5,283) (2,592) 971


Debt finance 6,459 3,623 10,000 5,000 0

Movement in cash (3,017) (1,000) 4,717 2,408 971

Per share (RMB)


FCF to equity per share (2.47) (1.06) (1.35) (0.60) 0.40







Goodwill 532 767 617 594 570


Investments 3,734 3,681 3,677 3,677 3,677

Other assets 339 253 253 253 253



Short term debt 13,610 15,869 15,869 15,869 15,869

Long term debt * 14,794 14,934 24,934 29,934 29,934

Net debt 18,204 21,616 26,899 29,491 28,521

Deferred tax 95 (25) (25) (25) (25)

Other liabilities 2,846 2,821 2,820 2,820 2,820

Total equity 10,978 11,260 11,718 12,203 12,816




Per share (RMB)



Financial strength

Net debt/equity (%) 76.5 79.8 92.9 94.9 84.7


Current ratio (x) 1.0 0.9 1.0 1.1 1.1


Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 3.3 10.1 8.9 8.4 6.7


Reported P/E (x) 3.3 10.1 8.9 8.4 6.7

Dividend yield (%) 4.5 1.4 1.6 1.7 2.2

P/CF (x) 0.8 1.1 0.9 0.8 0.7

P/FCF (x) (0.5) (1.3) (1.0) (2.2) 3.3

Price/book (x) 0.4 0.4 0.4 0.4 0.4


EV/EBITDA (x) ** 3.6 6.2 6.2 6.4 5.9




Sources: Sinoma; BNP Paribas estimates



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S) (BNP Paribas Securities (Asia) Ltd)

ANALYST(S) CERTIFICATION

Rachel Cheung, BNP Paribas Securities (Asia) Ltd, +852 2825 1824, [email protected].

The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst herein. Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations.

IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas").

The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

Company Ticker Disclosure (as applicable)

CNBM 3323 HK 6

Anhui Conch Cement 914 HK 6

Sinoma 1893 HK 6

China Resources Cement 1313 HK 6

Shanshui Cement 691 HK 6

BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the

company.

IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report:

Company Ticker Price (as of 11-Oct-2013 closing price) Interest

Anhui Conch Cement 914 HK HKD26.60 NA

Shanshui Cement 691 HK HKD3.16 NA

CNBM 3323 HK HKD7.82 NA

China Resources Cement 1313 HK HKD5.30 NA

Sinoma 1893 HK HKD1.70 NA

1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.

2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the

transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,

BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

7. the listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks

8. The Company is recognized as having considerable interests with BNPPSK. 9. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the

following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.



History of change in investment rating and/or target price

Anhui Conch Cement (914 HK)

Rachel Cheung started covering this stock from 10-Oct-2012 Price and TP are in local currency Valuation and risks: Target price is based on earnings and asset multiples. Downside risks include no price rebound in 4Q13 and a worse than expected East China market. Source: Bloomberg; BNP Paribas

Shanshui Cement (691 HK)

Rachel Cheung started covering this stock from 10-Oct-2012 Price and TP are in local currency Valuation and risks: Target price is based on earnings and asset multiples. Risks: Lower than estimated Liaoning and Shandong prices, lower than expected volume growth. Source: Bloomberg; BNP Paribas

CNBM (3323 HK)

Rachel Cheung started covering this stock from 10-Oct-2012 Price and TP are in local currency Valuation and risks: Target price is based on a residual income model. Downside risks: continued slowdown in FAI, substantial reductions in RMC profitability. Source: Bloomberg; BNP Paribas

Date Reco TP

14-Oct-09 REDUCE 24.6667

15-Dec-09 BUY 37.6667

23-Jun-10 HOLD 16.3333

25-Mar-11 BUY 32.6667

12.90

17.90

22.90

27.90

32.90

37.90

42.90

Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

(HKD) Anhui Conch Cement Target Price

Date Reco TP

4-May-11 BUY 13.1

2.67

4.67

6.67

8.67

10.67

12.67


(HKD) Shanshui Cement Target Price

Date Reco TP

14-Oct-09 REDUCE 7

15-Dec-09 HOLD 8.25

25-Mar-11 BUY 14.25

4.71

6.71

8.71

10.71

12.71

14.71

16.71

18.71

20.71

22.71


(HKD) CNBM Target Price



China Resources Cement (1313 HK)

Rachel Cheung started covering this stock from 10-Oct-2012 Price and TP are in local currency Valuation and risks: Target price is based on earnings and asset multiples. Upside risk: higher than expected south China cement price; downside: lower than expected volumes. Source: Bloomberg; BNP Paribas

Sinoma (1893 HK)

Rachel Cheung started covering this stock from 10-Oct-2012 Price and TP are in local currency Valuation and risks: Target price is based on SoTP. Upside risk: higher the expected North West cement price, downside: lower than expected new contract for Sinoma International. Source: Bloomberg; BNP Paribas

GENERAL DISCLAIMER This report was produced by BNP Paribas Securities (Asia) Ltd, member company(ies) of the BNP Paribas Group. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this report may not be available for sale in certain jurisdictions. As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this document, either for its own account or for the account of its clients.

Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN 23 000 000 117 at 60 Castlereagh Street Sydney NSW 2000. BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001).

Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in

Date Reco TP

10-Oct-12 HOLD 4.9

2.73

3.73

4.73

5.73

6.73

7.73

8.73


(HKD) CRC Target Price

Date Reco TP

14-Oct-09 REDUCE 3.7

18-Jun-10 BUY 6.3

10-Oct-12 HOLD 2.3

1.22

2.22

3.22

4.22

5.22

6.22

7.22

8.22

9.22

10.22


(HKD) Sinoma Target Price



Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence.

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Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative.

All share prices are as at market close on 11 October 2013 unless otherwise stated.

RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 15 October 2013)

Total BNP Paribas coverage universe 662 Investment Banking Relationship (%)

Buy 343 Buy 5.5

Hold 205 Hold 1.5

Reduce 114 Reduce 3.5

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2013 BNP Paribas Group

Detailed guidance from the State Council announcementStock recommendations

Documents

State Council announcement - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INDUS/2013/10/15/05de... · BNPP comments: Previously, when central government had approval authority, clinker