Haitong Company Report, 000798.CH Jiangxi Cement, 020110
Recently, we have paid a visit to Jiangxi Cement (000789.CH). Generally, we believe its profitability will see an obvious increase and its performance will see a turning point, due to favorable factors such as lower cost and large expansion of capacity in this year.
Investment highlights: (1) cement leader in Jiangxi, with some control on regional market. Jiangxi Cement is the leading business in the cement market of Jiangxi Province, and its main markets are in Northeast Jiangxi, and South Jiangxi. As recent 2 product lines are put into operation, the foregoing two regional markets will expect to take 60% market share, with certain control and price dominating power over regional markets. (2) Benefit from South Cement’s integration with Jiangxi region. Jiangxi Cement and South Cement jointly established South Evergreen, to have joint integration of Jiangxi regional market. Later, due to shortage of funds, South Cement established Jiangxi South on its own, and took this as a platform to continue the integration with Jiangxi, in order to control 30,000,000t capacity by 2010. South Cement’s integration with Jiangxi market will be conducive to stronger collaboration between major enterprises, and helpful to increasing profitability. (3) Large expansion of valid capacity in 2010. Jiangxi Cement had a 5,000t/d cement clinker product line put into operation in this January, and will have another 5,000t/d cement clinker product line put into operation in this April. It is expected that cement production will amount to 16,000,000-17,000,000t (about +60% YoY) this year. (4) Lower cost leading to increased profitability. Jiangxi Cement performed poorly historically, mainly due to high cost of cement per ton. This year, it has purchased a great deal of local blind coal and practiced the energy-saving measures such as waste heat power generation, so its cost of cement per ton will reduce substantially, thus bringing great increase of profitability. Since its profit per ton is low in 2009, it is performance is sensitive to the increase of profitability. (5) Probable benefit from the “building materials outreach to countryside” policy to be issued this year. It is expected that after the traditional Spring Festival, detailed rules of the “building materials outreach to countryside” will be published, when Jiangxi Province will be among the first pilot provinces. Jiangxi Cement will benefit from such policy since its main market is in new rural construction. It is forecasted that its EPS will be RMB0.18, RMB0.50 and RMB0.58 respectively in 2009, 2010 and 2011. Based on the closing price on January 29, its PE is ×45.4, ×16.3 and ×14.1 respectively based on 2009EPS, 2010EPS and 2011EPS. Considering large elasticity of its performance and probable benefit from the “building materials outreach to countryside” policy to be issued, we give it a “Buy” rating. Based on the 2010 PE ×20, the 6-mon target price is RMB10/share, and current price RMB8.17/share, so there is still a 22% room of price rise.
000798.CH
Jiangxi Cement Feb 1 2010
Jiang Kongliang,
Chief Analyst of Construction
Lower Cost and Capacity Expansion
Bring Turning Point of Performance
kljiang@https://www.wendangku.net/doc/6316745810.html,
Pu Shilin,
Building Material Assistant Analyst
pusl@https://www.wendangku.net/doc/6316745810.html,
021-********
Construction Materials-Cement
C o m p a n y R e s e a r c h
BUY Initial coverage
Table2005-1-3Q2009 Financials
2006 2007 20081-3Q09 Revenue(RMBmn) 812 1260 1918 2013 YoY growth (%) 25.37 55.23 52.19 50.55 Net profit (RMB mn) 8 32 94 48 YoY growth (%) -105 301.54 187.81 -15.14 Gross margin (%) 18.18 18.01 19.54 15.54 Net profit margin
(%)
1.00
2.59 4.90 2.42 Source: Company announcements, Haitong Securities Research Institute Table Profitability Comparison with Jinxi Cement
2005
2006
20072008
Jiangxi 225 197 227 252
Average
price/ton Jinxi
180
208
229
Jiangxi 218 161 186 203
Cost/ton
Jinxi
142
144
163
Jiangxi 6.69 35.97 40.92 49.41
Gross
profit/ton Jinxi
37.23
64.51
65.63 Source: Company announcements, Haitong Securities Research Institute
Performance forecasting: We make following presumptions based on the performance expectations in pessimistic,
neutral and optimistic scenarios:
1) Pessimistic scenario: In 2010, mean cement price in South Jiangxi and Northeast Jiangxi is at the same level with
that in 2009; mean coal price rises by RMB80/t, that is, the cost of cement will rise by about RMB10/t. The cement
production is 16,000,000t.
2) Neutral scenario: In 2010, mean cement price in South Jiangxi and Northeast Jiangxi is at the same level with that
in 2009; mean coal price rises by RMB50/t, that is, the cost of cement will rise by about RMB6/t. The cement
production is 16,500,000t.
3) Optimistic scenario: In 2010, mean cement price in South Jiangxi and Northeast Jiangxi is RMB3/t higher than that
in 2009 (transfer of 50% coal cost); mean coal price rises by RMB50/t, that is, the cost of cement will rise by about
RMB6/t. The cement production is 17,000,000t.
We have forecasted its earnings of the foregoing three scenarios. In neutral scenario, its EPS will be RMB0.18,
RMB0.50 and RMB0.58 respectively in 2009, 2010 and 2011. Because at present Jiangxi Cement has a high
asset-liability ratio, in lack of liquidity, its production capacity will not expand in 2011, without considering potential
following-up acquisition, and its performance growth in 2011 will rely mainly on the increasing profitability.
Table Main Assumptions of Jiangxi Cement Earnings Forecasting (in neutral scenario)
2007
20081H092009E
2010E
2011E
Cement sales volume (10,000t) 554.89 758.83 449.70 1,050.00 1,650.00 1,730.00
Northeast Jiangxi sales volume (10,000t) 552.21
767.65
847.65
Jinxi sales volume (10,000t) 112.83 250.00 250.00 South Jiangxi sales (10,000t) 384.96 632.35 632.35 Northeast Jiangxi average price (RMB/t)245.00 245.00 255.00 Jinxi average price (RMB/t) 220.00 220.00 230.00 South Jiangxi average price (RMB/t) 265.00 265.00 275.00 Northeast Jiangxi cost per ton (RMB/t) 210.00 200.00 205.00 Jinxi cost per ton (RMB/t) 150.00 150.00 155.00 South Jiangxi cost per ton (RMB/t) 200.00 190.00 195.00 Revenue (RMB10,000) 126,074.33 191,869.89 106,866.89 262,128.32 410,647.06 447,547.06 Operating cost (RMB10,000) 103367.28 154,376.24 90,679.10 209,880.53 311,176.47 335,826.47 Average price per ton (RMB/t) 227.21 252.85 237.64 249.65 248.88 258.70 Average cost per ton (RMB/t) 186.28 203.44 201.64 199.89 188.59 194.12 Gross profit per ton (RMB) 40.92 49.41 36.00 49.76 60.29 64.58 Source: Haitong Securities Research Institute
Table EPS Forecasting in 3 Scenarios (RMB)
2009E2010E 2011E
Pessimistic scenario 0.18 0.41 0.48
Neutral scenario 0.18 0.50 0.58
Optimistic scenario 0.18 0.55 0.64
Source: Haitong Securities Research Institute
Valuation analysis: At present, the average PE of cement A-shares is ×17 in 2010, while the PE of leading cement
producers is about ×15 in 2010, such as Conch Cement (600585.CH), Jidong Cement (000401.CH) and Huaxin Cement
(600801.CH). Based on the closing price on January 29, its PE will be ×45.4, ×16.3 and ×14.1 respectively in 2009,
2010 and 2011. We believe that Jiangxi Cement (000789.CH) will record an increased profitability since it has poor
profitability at present, its operating leverage is high, and its performance is very sensitive to the increase of profitability;
in all, its performance in 2010 and 2011 will be likely to be above our expectation. In addition, due to high rural market
share, Jiangxi Cement (000789.CH) will benefit from the “building materials outreach to countryside” policy to be issued
this year. What is more, its shareholding cement capacity will be approximately 10,000,000t in 2010; the present market
capitalization per ton is RMB323.5, merely equivalent to the cost of revaluation. Considering its profitability may continue
to increase in this year and next year, we set safety margin to valuation, and give it a “Buy” rating, with a 6-month target
price RMB10/share, equivalent to 2010 PE×20 or 2011 PE×17.2.
Table Cement Stock Relative Valuation
PE（x）
PB（x）
Stock Name
2009E 2010E 2011E
Jidong Cement (000401.CH) 21.41 14.73 11.90 3.06
Qilianshan (600720.CH) 19.46 14.77 11.92 3.58
Conch Cement (600585.CH) 19.71 15.16 12.44 2.64
Huaxin Cement (600801.CH) 18.35 14.52 13.79 2.08
Yatai Group (600881.CH) 19.53 16.52 13.83 2.27
Tapai Group (002233.CH) 23.80 16.61 14.40 3.19
Saima Industry (600449.CH) 17.77 15.19 15.24 3.53
Tianshan Cement (000877.CH) 21.89 18.11 16.56 6.32
Xinjiang Qingsong Cement (600425.CH)39.48 28.67 21.12 5.56
Average 22.38 17.14 14.58 3.58
Source: GILDATA
Disclosure
Rating Definition
Our rating system requires analyst to rate the companies and sectors he/she covers. These ratings represent analyst’s perspective about its investment prosperity based on historical fundamental analysis and valuation. The meaning of every rating is:
Company Ratings
Buy: 6-month return potential exceeds expected return of the market by over 15%
Overweight: 6-month return potential exceeds expected return of the market by 5% to 15%
Neutral: 6-month return potential equals expected return of the market
Underweight: 6-month return potential is lower than expected return of the market by 5% to 15%
Sell: 6-month return potential is lower than expected return of the market by over 15%
Sector Ratings
Overweight: 6-month return potential exceeds expected return of the market by over 5%
Neutral: 6-month return potential equals expected return of the market within the next 6 months
Underweight: 6-month return potential is lower than expected return of the market by over 5%
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