Greater China Equity Long/Short Analyst

Eric Chen

Equity Bottom-Up

<ul>
<li>We believe Anhui Conch is near the end of a prolonged downturn. Earnings should have bottomed out in 1Q24, with highly visible sequential Q/Q improvements throughout the rest of 2024.</li>
<li>The recovery is not demand-driven but cost-led as implementation of new national standards resulting in higher production costs led to industry-wide price-hikes, benefiting Anhui Conch the low-cost producer.</li>
<li>We see mild rebound in cement demand in 2025 will pave the way for further price hikes, reinforce the company’s earnings recovery and catalyze valuation expansion.</li>
</ul>


We believe Anhui Conch is near the end of a prolonged downturn. Earnings should have bottomed out in 1Q24, with highly visible sequential Q/Q improvements throughout the rest of 2024.
The recovery is not demand-driven but cost-led as implementation of new national standards resulting in higher production costs led to industry-wide price-hikes, benefiting Anhui Conch the low-cost producer.
We see mild rebound in cement demand in 2025 will pave the way for further price hikes, reinforce the company’s earnings recovery and catalyze valuation expansion.


Anhui Conch (914 HK): Turnaround in Sight

HK/China Equity Long-Short

Osbert Tang, CFA

<ul>
<li>Stable cement price, good cost control, and a better base for comparison will lift <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>'s profitability recovery in 2-4Q24.  <a href="https://www.smartkarma.com/entities/anhui-gourgen-traffic-cons-a" target="_blank" data-smartkarma-citation="entities:30237:1" rel="noopener"></a>
</li>
<li>Anhui Conch's earnings outperformed in 1Q24. Its peers are making losses and hence will reduce excess supply. Stabilisation of the real estate market will lower the pressure on demand.</li>
<li>Net cash equals 46% of the current share price, and its valuations (both PER and P/B) are inexpensive relative to peers and ROE.  </li>
</ul>


Stable cement price, good cost control, and a better base for comparison will lift Anhui Conch Cement (914 HK)'s profitability recovery in 2-4Q24.  

Anhui Conch's earnings outperformed in 1Q24. Its peers are making losses and hence will reduce excess supply. Stabilisation of the real estate market will lower the pressure on demand.
Net cash equals 46% of the current share price, and its valuations (both PER and P/B) are inexpensive relative to peers and ROE.  


Anhui Conch Cement (914 HK): Increasingly Favourable Odds

China Conch Venture Holdings / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> is now at negative stub value, the low-end since 2020. This is despite a 16.4% growth in 1H22 core earnings to Rmb542m.</li>
<li>The company's waste-to-energy (WTE) capacity will increase by 25% in FY23 and its internal target calls for an earnings CAGR of 33% between FY21 and FY25 for WTE segment.</li>
<li>We should not underestimate the potential from new business initiatives including cathode and anode materials and lithium battery recycling. They have good medium-to-long term exposure to China's new energy industry.</li>
</ul>



China Conch Venture Holdings (586 HK) is now at negative stub value, the low-end since 2020. This is despite a 16.4% growth in 1H22 core earnings to Rmb542m.
The company's waste-to-energy (WTE) capacity will increase by 25% in FY23 and its internal target calls for an earnings CAGR of 33% between FY21 and FY25 for WTE segment.
We should not underestimate the potential from new business initiatives including cathode and anode materials and lithium battery recycling. They have good medium-to-long term exposure to China's new energy industry.


Conch Venture (586 HK): An Overlooked Value Play

Analyst

Steve Zhou, CFA

<ul>
<li>
<a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a> is trading at a historical low forward P/B of 0.5x, compared to an average of 1.2x for the last decade. </li>
<li>In the long term, China cement will likely see much lower volume and lower cement prices in the short term, but eventually rising cement prices due to better supply picture. </li>
<li>As the lowest cost producer, Anhui Conch stands a very good chance to win out in the long term and potentially more than double its current market share. </li>
</ul>



Anhui Conch Cement (914 HK) is trading at a historical low forward P/B of 0.5x, compared to an average of 1.2x for the last decade. 
In the long term, China cement will likely see much lower volume and lower cement prices in the short term, but eventually rising cement prices due to better supply picture. 
As the lowest cost producer, Anhui Conch stands a very good chance to win out in the long term and potentially more than double its current market share. 


Anhui Conch Cement (914 HK):  Where Are We In The Cycle?

Thematic (Sector/Industry)

<ul>
<li>Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. </li>
<li>A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.</li>
<li>Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.</li>
</ul>


Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. 
A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.
Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.


China NPC: Implications of Government Working Report 2023

China

Anhui Conch Cement Company Limited manufactures cement products. The Company produces silicate cements, slag silicate cements, composite silicate cements, cement clinkers, and other products. Anhui Conch Cement Cement markets its products throughout China and worldwide.

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Anhui Conch Cement (600585 CH)

Anhui Conch (914 HK): Turnaround in Sight

We see Anhui Conch at the cusp of earnings recovery cycle which will extend well into 2025 and beyond, driving P/B expansion from current 0.7x to...

Eric Chen

Anhui Conch Cement (914 HK): Increasingly Favourable Odds

Anhui Conch Cement has rallied 14% in last week on the back of the government’s rescue of the property market through buying of unsold homes by...

Osbert Tang, CFA

Conch Venture (586 HK): An Overlooked Value Play

The market has deeply undervalued Conch Venture's waste-to-energy business as reflected by the negative stub value. New business initiatives and...

Osbert Tang, CFA

Anhui Conch Cement (914 HK): Where Are We In The Cycle?

Anhui Conch Cement is trading at a historical low P/B ratio. As the lowest cost producer, Anhui Conch stands a very good chance to win out in the...

Steve Zhou, CFA

China NPC: Implications of Government Working Report 2023

A 0.2pp higher budget deficit and a Rmb3.8trn special purpose bond quota suggested government spending will remain important economic driver. More...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Anhui Conch (914 HK): Turnaround in Sight

We see ​Anhui Conch at the cusp of earnings recovery cycle which will extend well into 2025 and beyond, driving P/B expansion from current 0.7x to...

Eric Chen

Anhui Conch Cement (914 HK): Increasingly Favourable Odds

Anhui Conch Cement has rallied 14% in last week on the back of the government’s rescue of the property market through buying of unsold homes by...

Osbert Tang, CFA

Conch Venture (586 HK): An Overlooked Value Play

The market has deeply undervalued Conch Venture's waste-to-energy business as reflected by the negative stub value. New business initiatives and...

Osbert Tang, CFA

Anhui Conch Cement (914 HK): Where Are We In The Cycle?

​Anhui Conch Cement is trading at a historical low P/B ratio. As the lowest cost producer, Anhui Conch stands a very good chance to win out in the...

Steve Zhou, CFA

China NPC: Implications of Government Working Report 2023

A 0.2pp higher budget deficit and a Rmb3.8trn special purpose bond quota suggested government spending will remain important economic driver. More...

Osbert Tang, CFA

We see Anhui Conch at the cusp of earnings recovery cycle which will extend well into 2025 and beyond, driving P/B expansion from current 0.7x to...

Anhui Conch Cement is trading at a historical low P/B ratio. As the lowest cost producer, Anhui Conch stands a very good chance to win out in the...