ORD Daily Insight

类型：投资策略机构：申银万国证券(香港)有限公司研究员：Rong Ye 日期：2015-06-29

Investment Highlight:

    Conflict resolution

    WEST CHINA CEMENT (2233:HK)

    Analyst: Rong Ye

    On 18 June, West China Cement (WCC) announced that Anhui Conch (914:HK),China’s largest cement manufacturer, will acquire a 16.7% stake (903m newshares) in WCC for HK$1.5bn at HK$1.69/share. The share price representsRmb359 EV/t, lower than the industry average of Rmb444/t. After thesubscription, Conch will be the second largest shareholder of WCC behind groupChairman, Zhang Jimin. Investors believe WCC is fairly valued at HK$1.60, asimilar level to the subscription price.

    Price power. As the two largest cement manufacturers in Shannxi Province, WCCoccupies a 25% market share, while Conch occupies 30%. Conch is WCC’s maincompetitor in the region. The two have previously engaged in price wars, resultingin a lower local cement price (P.O 42.5) of Rmb220/t in 2014 (Rmb390/t in 2010).

    After the acquisition, WCC and Conch will jointly control 55% of the cementmarket in Shannxi. We believe the cooperation will raise the price of local cementand thus profitability in this region.

    Narrow the gap. In 2013-14, WCC’s share price ranged from HK$0.78- HK$1.48.

    This implies an EV/t range of Rmb243-371, significantly lower than the industryaverage replacement cost of c.Rmb400-450. The company’s share price cap wasprimarily due to regional price wars with Conch. After the acquisition, we believethe probability of a regional price war is low. WCC will negotiate with Conch onfurther market cooperation. We expect WCC to utilise Conch’s managementexperience or receive asset injections from Conch. WCC is trading at Rmb338EV/t,while Conch trades at Rmb511/t, we believe further cooperation will narrowWCC’s valuation gap.

    Maintain BUY. Based on the structural market change and subsequent enhancedpricing power, we raise our EPS forecasts from Rmb0.090 to Rmb0.092 in 15E(1,179.6% YoY) and Rmb0.13 to Rmb0.14 in 16E (+67.9% YoY). We thus raise ourtarget price from HK$1.50 to HK$2.34, implying Rmb455 EV/t. With 46% upside,we maintain BUY.