海螺水泥(600585)

Conch Cement reported a recurring net profit of RMB7.7bn in Q3 2018, up 149% YoY.Sales volume grew impressively by 22.6% YoY to 93.9m tonnes, including about 17mtonnes from the trading platform. Blended ASP (cement and clinker) rose fromRMB316/tonne in Q2 2018 to RMB328/tonne in Q3 2018. Q3 2018 net profit implies ourQ4 2018E net profit is about RMB7.3bn, which looks low since Q4 is usually a peakseason for volume and price. Therefore, we raise our 2018E/2019E EPS by 5%/8.2%.We reiterate our BUY rating, but lower our H-share target price from HK$65 (2.7x2018E PBR) to HK$57.50 (2.37x 2018E PBR, 1 standard deviation above the average)to reflect the lower risk appetite of investors after the recent sharp market correction (Ashare target price: RMB47, 6% discount to our H-share target price, based on the average discount in the past few years).

Investment Highlights

Q3 sales volume grew 22.6% YoY. The Company sold 76.9m tonnes of cement andclinker it produced in Q3. Thanks to strong sales volume from its trading platform, totalsales volume in Q3 was 93.9m tonnes, up 22.6% YoY. Blended ASP rose fromRMB316/tonne in Q2 2018 to RMB328/tonne in Q3 2018, which is better than expected, since Q3 is usually a low season due to rainy weather.

Gross profit per tonne dropped due to trading business. Gross profit per tonne fellfrom RMB147 in Q2 2018 to RMB127 in Q3 2018 although the ASP increased QoQ.The decline was distorted by sales volume from the trading platform, which accountedfor 18% of total sales volume in Q3. Overall, it is still positive, leading to 149% growth inQ3 recurring net profit. In addition, the trading platform also enhances the pricing powerof the Company in some regions.

Q4 outlook remains upbeat. Based on the latest price and inventory level informationfrom Digital Cement, cement prices in east and south central China still maintained amoderate uptrend (Figure 2 and 3), while inventory levels remained low (Figure 4 and5), which should bode well for Q4 2018 performance.

Upward earnings revision. Q3 2018 net profit suggests our Q4 2018E net profit isabout RMB7.3bn (Q3: RMB7.7bn), which looks low since Q4 is usually a peak seasonfor volume and price. Therefore, we lift our 2018E/2019E EPS by 5%/8.2%. After therecent correction triggered by overall market weakness, Conch Cement-H is trading at6.2x 2018E PER, with a 7.2% dividend yield, which looks too bearish with a net cashbalance sheet.