Net profits, revenue sink at West China Cement
But firm expects gross margins to rise in second half as sales prices and volumes rise
West China Cement expects better profits and revenue in the second half, after a dismal first half.
The cement producer's net profit plunged 64.6 per cent to 148.5 million yuan (HK$181.6 million) in the first half, while revenue dropped 7.2 per cent to 1.59 billion yuan. Net profit was 15 per cent below consensus forecasts, according to a CIMB report by Kevin You and Jeannette Sim.
West China Cement chairman Zhang Jimin said production capacity would rise by up to 50 per cent in the second half. "Our production costs will go down as our scale increases," he said. "So our gross margin will rise in the second half. With selling prices and sales volume rising … our profits and revenue will increase."
Zhang said the company's cement sales would be boosted by infrastructure projects in Shaanxi province. He said West China Cement was supplying cement to the Datong-Xian high-speed-rail project and the Xian-Ankang second rail project.
The CIMB report said: "We expect a stronger second half as prices in Shaanxi have bottomed due to strong demand growth from various railway projects. In addition, full contribution from the four new production lines should support a 36 per cent jump in sales volume [from the first to second half]. Thus we are comfortable with our full-year earnings forecasts."
For the whole of this year, CIMB forecasts West China Cement's net profit will fall 17.8 per cent to 544 million yuan, while turnover will grow 22 per cent to 3.89 billion yuan.
Daiwa Securities analyst Felix Lam said he was "reasonably optimistic" on West China Cement for the second half". Lam said cement prices in Shaanxi hit bottom in the first four months of this year, but they were now higher. "I don't see prices or margins declining further. Based on prices right now, their second half is going to be better than the first half," Lam said.
On August 8, US short seller Glaucus Research Group accused West China Cement of fraud, inflated profits and suspicious acquisitions. The cement firm's share price is down to HK$1.18 from HK$1.30 on August 8.
West China Cement executive director Low Po Ling said her company was consulting its lawyers and reserved the right to take legal action against Glaucus. Low said that since the Glaucus report came out, Italcementi Group, West China Cement's third-biggest shareholder, had held discussions three or four times with the mainland company.
"Italcementi was very unhappy. It will issue a statement," Low said.