The ViewAnalysts still bullish on China’s big cement producers and banks
While no one knows for sure what mainland officials mean by ‘supply-side reform’, it has come to be associated with the removal of excess capacity
The top-down tale of China’s industrial supply glut is often told with stunning comparisons – e.g., in the past few years, China produced twice as much cement as the United States consumed in the whole of the 20th century.
The bottom-up story is told with red ink. Overall profits in the Chinese cement industry shrank by 60 per cent in 2015, and according to BOC International estimates, about 40 per cent of cement companies made losses.
Nevertheless, analyst recommendations for the biggest cement companies tilt more bullish than bearish. Consider the case of China Resources Cement. Most brokers have “hold” recommendations, but there are six “buys” against four “sells”, according to consensus data from FT Markets.
Besides operating in an imploding sector, CR Cement is also vulnerable to the weakening yuan. Last year’s fall in the renminbi increased the company’s foreign-currency debt expenses by HK$800 million, whacking at least a quarter off earnings before interest and tax.
BOCI projects another HK$500 million foreign-exchange loss in 2016. Yet the bank has a buy on the shares, noting that CR Cement’s market value is just 23 per cent of its liquidation value. In short, BOCI believes the shares are oversold.
Brokers are betting that either market fundamentals or Chinese state directives will shut down excess capacity in the cement sector
The analyst community is even more bullish on Anhui Conch Cement, with seven “buy” recommendations against just two “sells”. BOCI, which recently released a detailed report on the cement sector, thinks Anhui Conch is also oversold, and as with CR Cement, thinks the H shares could rebound by 40 per cent.