Feuding Shanshui left behind as cement sector picks up

PUBLISHED : Saturday, 15 April, 2017, 8:33am
UPDATED : Saturday, 15 April, 2017, 8:33am

While shareholders squabble over who should be in control and what should be done to resolve China Shanshui Cement Group’s liquidity and debt problems, the cement industry has seen a marked turnaround in fortunes.

And the better times are likely to continue through this year, according to some analysts.

“With cement companies more willing to collaborate on [production] suspension [when supply is ample], profitability [is set] to improve [further] this year,” Citi’s analysts said in a report.

They cited industry consultancy Digital Cement’s chief cement analyst Wang Xiaoliang, who forecasts that this year the industry as a whole could make a profit of 60 billion to 70 billion yuan, up from 52 billion yuan in 2016 and 33 billion yuan in 2015.

Shanshui posted a net loss of 738 million yuan last year, narrower than the 6.4 billion yuan loss in 2015 that included 4 billion yuan of asset write-downs.

Nationwide, average cement prices in an industry characterised by oversupply have remained for the past six months at close to the highest level in three years, after surging more than 40 per cent from a trough in the first quarter of last year.

Shanshui is a legitimate company with potential. Unfortunately for shareholders, it lacks a majority shareholder
Brock Silvers, managing director, Kaiyuan Capital

According to Wang, industry production discipline can help shore up prices in the short term, and elimination of high-cost production lines via tiered power prices and more consolidation would help in the medium to long term.

Last year, Beijing ordered the mergers of two pairs of state-owned industry majors, with the No. 1 player China National Building Material (CNBM) merging with third-ranked China National Materials (Sinoma). And BBMG, the 10th largest player, is merging with fourth-ranked Tangshan Jidong Cement.

Analysts said Shanshui’s drawn-out corporate control drama highlights the greater challenges facing takeover initiators of mainland Chinese firms with dispersed private shareholding, as compared to consolidation among state-owned enterprises.

The fight for control of Shanshui appears to have intensified at a time when cement makers are regaining popularity among investors due to state development programmes such as the newly announced Xiongan special economic zone in Hebei province, said Brock Silvers, managing director of Shanghai-based financial advisory firm Kaiyuan Capital.

“Investors can sense a chance to recoup losses,” he said. “It is a shame [that violence broke out], Shanshui is a legitimate company with potential. Unfortunately for shareholders, it lacks a majority shareholder.”

CNBM bought 563.2 million of Shanshui’s shares at HK$2.77 for a total of HK$1.4 billion in October 2014, which it has kept until now.

Full disclosures of Asia Cement’s trading in Shanshui is not available. Of 12 transactions disclosed, it had bought HK$990.5 million worth of Shanshui shares at an average price of HK$3.6 between June 2012 and December 2014.

Asia Cement had written down the value of its Shanshui stake to HK$1.58 per share on its books at the end of last year, while CNBM has pared its to HK$1.48, according to their annual reports.

China Shanshui’s net asset value per share was HK$1.1 at the end of 2016, down from HK$1.6 at the end of the previous year due to the hefty asset impairments.