Conch Cement - Intial Thesis

Conch Cement
Thesis : Middle - Fast Grower, with a cyclical outlook. Boring basic materials company, with a strong balance sheet, low cost advantage, steadily improving business conditions and profit margins. Exposure to China Cement Industry but significant foreign currency inflows from overseas subsidiaries. Buying a Cheap stock with good economic fundamentals, Good ROA and ROE, low debt and highly Solvent, Good Net profit margin and reasonable short term cash position. Considering the nature of a cyclical industry, I will not put in money into this seemingly good stock until I have conducted further analysis on the nature of the cement / infrastructure cycle.
 

Symbol

Name

Cur. R. (X)

GP Margin

Dividend

Yr end

ROE

ROA

NP Margin

Quick R. (X)

Debt/Equity

00914.HK

CONCH CEMENT

2.76

35.64%

30.02%

2018/12

26.55%

19.97%

23.25%

2.53

9.10%

Macro Outlook

China will continue to implement the strategy of regional coordinated development by promoting the construction and development of urban agglomerations such as the Yangtze River Economic Belt, Xiong’an New Area and Guangdong-Hong Kong-Macau Greater Bay Area, continuing to push forward the development of Western China and boosting the development of Central China, with an aim to achieve a relatively balanced development of infrastructure and basic public services among these regions, thus maintaining investments in infrastructure at a high and stable level. The construction area and land acquisition area of real estate both maintained a growing trend in 2017, which is expected to continue in 2018, providing strong support for the cement market demand. At the same time, it is expected that China will continue to deepen the supply-side structural reform and eliminate excessive capacities and backward capacities by insisting on adopting approaches based on market mechanism and the rule of law as well as strictly implementing the regulations and standards in terms of environmental protection, quality and safety, etc. Coupled with the continuous promotion of off-peak season production and the continuous implementation of industry consolidation and restructuring, the market concentration will steadily increase and the business environment of the industry will be constantly improved.

In 2017, the cement industry remained stable in general and initiatives including the supplyside structural reform continued to have positive effect. Certain cement enterprises that failed to meet the requirements for environmental protection facilities or discharge standards were required to suspend production for rectification under the overall environmental protection inspections implemented by the PRC government, which improved environment and progressively reduced product supply. The major enterprises continued to push forward the merger and consolidation of the industry to further increase market concentration and improve the supply-and-demand condition in the industry. In 2017, the fixed asset investments in China showed a slow but stable growth, while the growth in infrastructure investments maintained at a high level.

Benefiting from the positive impact of the supply-side structural reform of the industry, product price recorded significant increase as compared with that of the same period of the previous year, significantly enhancing the profitability of the industry.  

Lines Of businesses

production and sale of cement, commodity clinker and aggregate. The Group produced and sold cement products according to market demands, which mainly included 42.5-grade cement, 32.5-grade cement and 52.5-grade cement, widely used in the construction of domestic infrastructures including large-scale engineering projects such as railways, expressways, airports and hydraulic power as well as urban property, cement products and the rural markets. As part of the basic raw material industry, cement is a regional product as its sales radium is subject to transportation and local cement price

sales model with its focus on direct sales and supplemented by distribution, and has established over 500 marketing departments in the marketplaces where the Company operates across the PRC and overseas, building up an extensive marketing network.

proactively accelerating the construction or lease of the transfer storage and other landing stages in the middle and lower reaches of Yangtze River and along the coast, so as to further improve the market planning and strengthen the control of the market.

development strategy of internationalization.
Meanwhile, the Group proactively explored into the upstream and downstream industrial chain, rigorously promoted the aggregate business and entered the commodity concrete industry

“Conch model”, establishing strong advantage in resources, technology, human resources, funding, market share and brand recognition. Promoting independent innovation and technology innovation, facilitating energy conservation and emission reduction and developing recycling economy.Innovation of new dry-process cement technique and application of energy conservation and consumption reduction technology.

maintain its low-cost advantage in the industry by reducing coal and electricity consumption, improving productivity and enhancing cost control.

strengthening research and analysis on the market supply-and-demand condition and adhering to the marketing strategy of “one policy for one region, one policy for one plant and implementation of differential policies”.

Achieved stable increase in sales volume and significant increase in product price. The Group made bulk procurement of raw materials and fuel and optimized resource allocation, thereby effectively controlling procurement costs. Moreover, the Group strengthened indicator management and control over production and operation, leading to continued improvement of operation quality and substantial improvement in operating results

Operating Performance

Group’s revenue generated from its principal activities amounted to RMB73.592 billion, representing an increase of 34.22% Acquisition risks

the net profit attributable to equity shareholders of the Company amounted to RMB15.855 billion, representing an increase of 85.87%

earnings per share was RMB2.99, representing an increase of RMB1.38 per share

revenue amounted to RMB75.311 billion, representing an increase of 34.65%

net profit attributable to equity shareholders of the Company amounted to RMB15.899 billion, representing an increase of 85.43% 

aggregate net sales volume of cement and clinker of 295 million tonnes, representing a year-on-year growth of 6.6%

construction and mergers and acquisitions of domestic projects.

Eight cement grinding units had completed construction and been put into operation. Production capacity of clinker, cement and aggregates of the Group increased

substantial rise in product composite selling prices, the consolidated gross profit margin recorded a year-on-year increase of 2.74 percentage points to 35.59%,

consolidated gross profit margin of products produced and marketed by the Group increased by 3.43 percentage

gross profit margins of the 42.5-grade cement, the 32.5-grade cement and the clinker increased by 2.89 percentage points, 0.52 percentage point and 6.14 percentage points

consolidated gross profit margin of aggregate and carpolite increased by 17.86 percentage points year-on-year to 63.98%,

further improvement in the aggregate market supply-and-demand condition due to the efforts by the national and local governments to strengthen the management of mineral resources.

growth in sales volume and significant increase in prices, recording a year-on-year increase in sales amount of 42.13% and 45.71% respectively and a year-on-year increase in gross profit margins of 4.97 and 2.11 percentage points

slight decrease in sales volume and increase in prices, resulting in a year-on-year increase in sales amount of 8.90% and a year-on-year increase in gross profit margin of 3.87 percentage

Key Risks
Corporate Governance

None of the Directors, Supervisors or their respective associates (as defined in the HKSE Listing Rules) nor, to the knowledge of the Board, shareholders holding 5% or more of the issued shares of the Company had interests in any of the five largest customers or five largest suppliers of the Group for the year ended 31 December 2017.

Quality of accounting statements (Missing Cash risk)

The Group’s deposits as at 31 December 2017 were placed with reputable commercial banks. The Group has no entrusted deposits or term deposits which cannot be withdrawn upon expiry.

foreign fund pool, so as to lower costs of exchange settlement and sales, effectively reducing finance costs.

actively explored fund transfer models between subsidiaries in the same country, so as to complement each other’s capital advantage, enhance capital economies of scale and reduce loss from currency exchange.

increased the loans denominated in the currencies of the countries where it operates to an appropriate extent, so as to match the financing currency with the settle requirements.

Furthermore, the Company used swap instruments to hedge foreign exchange risk based on currency performance.

In active response to the temporary appreciation of Renminbi, the Company also made appropriate foreign exchange payment arrangements based on the import and export plan by adjusting its operation strategy for foreign exchange risk on a timely basis and conducted strategic dealings in short-term deposit products denominated in US dollars, in an effort to maximize gains from foreign exchange.

Cash Flow Associated Risks

rising prices of raw materials and fuel
Cost management Risk

Forex Risk. The equipment, fire-resistant tiles and spare parts imported by the Group were mainly settled in US dollars and Euro dollars, while cement and clinker and equipment for export were usually settled in RMB or US dollars. The purchase of materials and sales of commodities by overseas companies were mainly settled in local currencies. Any change in the exchange rates of such foreign currencies against RMB will directly affect the project construction costs, material procurement costs and export sales revenues of the Group.

 

the Group’s gearing ratio calculated in accordance with the PRC Accounting Standards was 24.71%, representing a decrease of 1.97 percentage points as compared to that at the end of the previous year.

 

OverExpansion and Acquisition Risk
Potential great changes in the market conditions subject to the china government.
Heavy Acquisition Driven growth, nonetheless the balance sheet is considerably strong.

Company and Myanmar MYINT Investment Group (“MYINT”) jointly invested in and established Myanmar Conch Cement (Mandalay) Co., Ltd

Conch International Holdings (HK) Limited (“Conch (HK)”), a wholly-owned subsidiary of the Company, and Battambang KT Cement Co., Ltd. (“KT Company”, the business partner from Cambodia)

Conch (HK) and Krittaphong Group Co., Ltd (“Krittaphong Group”) jointly invested in and established Vientiane Conch Cement Co., Ltd. in Laos

Company and Zunyi Huichuan Louhaiqing Tourism Development & Investment Co., Ltd. (“Louhaiqing Investment Company”) jointly invested in and established Zunyi Haihui New Materials, with a registered capital of RMB45 million.

jointly invested in and established Guangyuan Conch New Materials Co., Ltd., with a registered capital of RMB40 million

Company and Sichuan Dingfeng State-owned Assets Investment and Operation Co., Ltd. (“Dingfeng Investment Company”) jointly invested in and established Bazhong Conch Building Materials Co., Ltd., with a registered capital of RMB50 million.

Company invested in and established Chizhou Conch New Materials Co., Ltd., with a registered capital of RMB50 million, which is held as to 100% by the Company.

Company acquired the 50% equity interests in Guiyang Conch Panjiang Cement Co., Ltd., 50% equity interests in Guiding Conch Panjiang Cement Co., Ltd., 50% equity interests in Zunyi Conch Panjiang Cement Co., Ltd., 49% equity interests in Qianxinan Resource Development Co., Ltd. and 49% equity interests in Tongren Conch Panjiang Cement Co., Ltd. from Guizhou Panjiang Investment Holding (Group) Co., Ltd

acquisition of 65% equity interests in Shaanxi Phoenix Building Materials. The registered capital of Shaanxi Phoenix Building Materials is RMB584.612 million. Shaanxi Phoenix Building Materials has a 4,500t/d clinker production line, an ancillary cement grinding production line with an annual capacity of 2.2 million tonnes, and an aggregate production capacity of 2 million tonnes.

jointly invested in and established Anhui Jiangbei Haizhong Building Materials Trading Co., Ltd., with a registered capital of RMB10 million. 

Company and Xing’an Xintai Urban Construction Investment & Development Co., Ltd. (“Xintai Urban Investment Company”) jointly invested in and established Xing’an Conch New Materials Co., Ltd., with a registered capital of RMB40 million.

Company and Huang He, a natural person, jointly invested in and established Wuhu Conch Mining Co., Ltd.,

Company invested in and established Chongqing Conch Material Trading Co., Ltd., with a registered capital of RMB100 million

As at the end of the Reporting Period, the Company had 140 majority-owned subsidiaries, 6 jointly–controlled entities and 2 associated entities

Capital Recyling through sale of existing share instrucment

the Company decreased its shareholdings in the aforesaid companies and realized investment return of RMB1.860 billion.

Financing risks

Due to the increase in product prices and operating revenue, the currency funds, receivable notes and receivable accounts were increased by 58.86%, 70.90% and 61.87%

Low Client concentration risk

For the year ended 31 December 2017, in the business operation of the Group, the aggregate sales amount of the Group to its five largest customers amounted to RMB1.709 billion, representing 2.27% of the total sales amount of the Group; and the largest customer accounted for 0.78% of the total sales amount of the Group; the aggregate purchases amount from the five largest suppliers amounted to RMB7.751 billion, representing 15.86% of the total purchases amount of the Group; and the largest supplier accounted for 6.33% of the total purchases amount of the Group. So far as is known to the Group, the five largest customers and suppliers have no connection with the Group.

Useful Links
Annual Report
DBS Industry Report - China Cement Sector\

https://www.rediff.com/money/2005/jan/17perfin1.htm
http://valueinvestorindia.blogspot.com/2008/07/cement-industry-stock-analysis.html
https://www.moneyworks4me.com/investmentshastra/analyst-corner/economic-outlook/riding-the-cycle-%E2%80%93-cement-industry/