Broker's View

Cement prices to rally thanks to booming property market

Total revenue of the 17 cement makers listed in the A-share market grew 4.8pc in the second quarter, while net profit hit 4.81 billion yuan

PUBLISHED : Tuesday, 27 September, 2016, 3:30pm
UPDATED : Tuesday, 27 September, 2016, 10:42pm

Chinese cement prices are predicted to rebound strongly in the remaining three months of the year, say analysts, thanks to surging domestic home prices, which have also boosted the share prices of cement manufacturers listed in the mainland and in Hong Kong.

Surging mortgage loans have pushed up the average home prices in China’s four first-tier cities by over 30 per cent so far this year, and the momentum could continue well into the fourth quarter and the first half of next year, Jefferies analysts Po Wei and Howard Lau wrote in a research report.

Most domestic property developers are now accelerating their construction activities to take advantage of the increase in sales, and that in turn should help support construction demand in the second half of this year, although growth should be slower than in the first half, the report said.

Jefferies expects construction demand in the second half to rise 2 per cent year on year, lower than the 5 per cent year on year growth in the first six months.

Demand for cement in the second half will be largely reflected in the fourth quarter after floods in July and August disrupted most building activity, Jefferies said.

“We expect the seasonal rebound in demand to drive up cement prices strongly in core regions. Due to the low base effect...the cement price has risen by more than 10 per cent over the past month in east China,” it said.

We expect the seasonal rebound in demand to drive up cement prices strongly in core regions
Po Wei and Howard Lau, Jefferies analysts

Both the cement price and the earnings of cement makers started rising in the first quarter, and are now expected to peak in the final quarter, CICC analysts Chai Wei and Chen Yan wrote in a separate report.

The total revenue of the 17 cement makers listed in the A-share market grew 4.8 per cent in the second quarter, year on year, while net profit hit 4.81 billion yuan, compared with a net loss of 560 million yuan in the first quarter, data compiled by China Galaxy International shows.

The aggregate net profit in the first half was 4.25 billion yuan, down 27 per cent year on year, but many of the country’s cement producers managed to return to profit in the second quarter.

China Galaxy ranked Shanghai-listed Anhui Conch Cement Co as the best performing producer in the second quarter, with net profit, excluding non-recurring items, in the period rising 25 per cent year on year.

“Although BBMG Corporation’s recurring net profit jumped 116 per cent in the second quarter, year on year, it was mainly driven by its real estate business,” it added.

CICC tips both A-shares and H-shares in Anhui Conch and BBMG, as well as Shenzhen-listed Tangshan Jidong Cement Co.

While Jefferies has a “Buy” rating on Hong Kong-listed China Resources Cement, with a target price of HK$3.11. The company’s shares have climbed more than 30 per cent this year.

Jefferies also highlights the likelihood of Hong Kong listed China National Materials Company, or Sinoma, becoming a possible merger or acquisition target, given its share price of 60 per cent discount to its holding value.

In an attempt to put the brakes on China’s red-hot property market, cities including Hangzhou, Nanjing and Suzhou have relaunched home purchase curbs in the past couple of months.

“While we have seen minor property price curbing measures in Nanjing and Suzhou,” Jefferies said, “these don’t appear to be enough to cool prices down.”

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