China Cement Sector
Industrials – Basic Materials Michelle Leung 25 May 2011

Table of Contents
CHINA CEMENT SECTOR .................................................. 1 INVESTMENT SUMMARY ................................................... 2 CEMENT IS STILL CHEAP ................................................. 3 STRONG DEMAND PULL ................................................. 10 MORE CAPS ON SUPPLY SIDE ....................................... 16 PROVINCIAL ANALYSIS .................................................. 23 PEER COMPARISONS ..................................................... 26 COMPANY UPDATE
ANHUI CONCH (914 HK) ....................................................... 29 CHINA NATIONAL BUILDING MATERIAL (3323 HK)................... 45

LISTED COMPANIES IN THIS REPORT .............................. 61

This document may not be distributed in or into the PRC.

Industrials – Basic Materials | Sector Update

25 May 2011

OVERWEIGHT
Company
Anhui Conch CNBM Shanshui Cement CR Cement West China Cement

China Cement Sector
Cementing Growth over the Twelfth Five-Year Period
We have seen share price corrections of over 10% across the board since the rapid run in 4Q10. Some investors wonder if the heat on the cement stocks has been overdone and if the positives have been priced in. We reiterate our bullish view on the cement sector. With only a 0.7% CAGR over the last decade, we think China’s cement prices are still cheap. With the potential easing of oversupply by 2013, we see strong support for cement prices going forward. That said, we consider eastern and southern China our most favoured regions, given their strong fundamentals and less growth slowdown in new construction project starts in 1Q11. In our Hong Kong-listed cement universe, we choose Anhui Conch as the top pick and least prefer West China Cement (WCC).

Stock code

TP

Rating

914 HK HK$40.70 BUY 3323 HK HK$17.30 BUY 691 HK HK$11.90 BUY 1313 HK HK$7.23 BUY 2233 HK HK$3.25 HOLD

Where are we Different? Our detailed estimation of cement demand from social housing and analysis that it should more than offset the commodity housing slowdown Our above-consensus EPS estimates for Conch Key Highlights of this Report Estimated cement demand from social housing Analysis of % achievement needed from social housing to offset commodity housing slowdown Scorecard for province preferences Scorecard for cement company preferences Key Catalysts/Events Analyst marketing in Hong Kong

Fig. 20 Fig. 21 Fig. 41 Fig. 53

Cement Prices Still Very Cheap
Dogged by overcapacity, the national average cement price has stagnated over the past decade (0.7% CAGR and up only 9% during 2000-10), compared with a more than 260% increase in the coal price during the same period. Although eastern China outperformed last year in terms of cement price hikes, substantial upside still exists given that over the past 13 years, the cement price in the region has underperformed the national average with a 4.6% YoY decline (vs. a 4% rise in the national average).

26-27 May

Social Housing Impact > Commodity Housing
Anhui Conch's Sales Exposure by Segment in 2010
Infrastructure 40% Property 33%

We believe cement demand will be boosted by 3-7% per year during 2011-13, assuming an 80% achievement rate of the government’s unit construction target in our base case. According to our scenario analysis, if the social housing achievement rate is above 70% this year, it could offset a 30% fall in GFA starts for commodity housing. Anhui Conch should be the largest beneficiary under social housing construction.

Demand Pull from Rapid Urbanisation
Rural areas 27%
Source: Company data

Rapid urbanisation in China is expected to sustain a high level of construction activities, especially for water conservancy and infrastructure upgrades in the 12th 5-year Plan (5YP) period. China National Building Material (CNBM) should benefit the most given its largest exposure to rural areas among all listed names.

CNBM’s sales exposure by Segment in 2010 China United South Cement Infrastructure 40% 20% Urban development 45% 70% Real estate 15% 10%
Source: Company data, BOCI Research estimates

More Caps on Supply Side
The Ministry of Industry and Information Technology (MIIT) has accelerated the plan to eliminate obsolete capacity, especially in provinces such as Hebei, Shanxi, Liaoning and Zhejiang. This bodes well for CNBM and Shanshui Cement.

Top Buy
Anhui Conch is our top pick in the sector (target price: HK$40.70). As the second largest cement producer in China and one of the most cost-efficient, we believe Conch should trade at a premium to peers. Moreover, we believe it is one of the biggest beneficiaries of social housing construction. Despite its large size, we expect the company’s net profit to register a 46% CAGR in 2010-13 and anticipate it will become one of the fastest-growing companies in the cement universe. Trading at only 11x 2011 P/E, we think now is a good time to BUY.

BOCI Research Limited China: Industrials – Basic Materials Michelle Leung
(852) 3988 6431 michelle.leung@bocigroup.com

BOCI research is available electronically on Bloomberg (BOCR <go>), thomsonreuters.com and www.bociresearch.com.

In this regard.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 INVESTMENT SUMMARY We have seen share price corrections of over 10% across the board since the rapid run in 4Q10. China National Building Material. Cement demand stemming from social housing should be able to offset the slowdown in the property market. We reiterate our OVERWEIGHT rating for the sector. The central government will not resume approvals of new production lines. so we must be more selective in terms of cement companies’ exposure by province. in our view. The national cement prices have continued the upswing that began in 1Q11. Our ranking of cement companies is: Anhui Conch. Some investors wonder if the heat on the cement stocks has been overdone and if the positives have been priced in. China Resources Cement and West China Cement. Moreover. Industry consolidation should continue. up 19% YoY as of 20 May. Having said that. urbanisation should remain the major growth driver for cement demand. Our positive view is based on our belief that: 1) 2) 3) Cement is still cheap. 4) We think the cement sector has become attractive once again after the recent share price correction. 2 . thus providing greater pricing power for companies with larger market shares. the growth slowdown for new project starts has made us wary of a possible slowdown in cement demand growth later in 2012. eastern China is still the safest. thus restricting supply growth for at least the next 2-3 years. This document may not be distributed in or into the PRC. Shanshui Cement. We reiterate our bullish view and believe that the recent correction has been more a result of market sentiment than of fundamentals.

Figure 1. Eastern China was the top performing region in China last year in terms of cement price hikes (up 60% to RMB513/tonne). BOCI Research Figure 2. . Historical Cement Price Trend in Eastern China Eastern China cement price: 2% CAGR in 1997-2010 and up 23% from 1997 to May 2011 (Rmb/tonne) 500 450 400 350 300 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 250 Source: Digital Cement. Cement deserves more upside going forward given the continuously improving demand and supply balance. and we see it as STILL low. the cement price in eastern China has underperformed the national average with a 4. there should still be substantial upside given that over the past 13 years. the national average cement price has stagnated over the past decade (0. Historical National Cement Price Trend (Rmb/tonne) 450 +0% CAGR within 1997-2010 400 350 +39% from trough in 2007 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 YTD YTD 3 300 Source: Digital Cement.6% YoY decline (vs. compared with the national average of 18% growth to RMB431/tonne. Having said that. Dogged by overcapacity.7% CAGR and 9% growth during 2000-10) compared with a more than 260% coal price increase in the same period.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 CEMENT IS STILL CHEAP We remain positive on the cement sector despite many investors posing the same question after the recent cement price run: “Is the current high price sustainable?” Our answer is YES. a 4% rise in the national average). BOCI Research This document may not be distributed in or into the PRC.

BOCI Research Figure 5.6% from 1997 to May 2011 (Rmb/tonne) 450 400 350 300 250 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Digital Cement. BOCI Research Figure 4.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 3. Historical Cement Price Trend in NE China NE China cement price: 0% CAGR in 1997-2010 and down 1% from 1997 to May 2011 (Rmb/tonne) 420 400 380 360 340 320 300 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 280 Source: Digital Cement. YTD . Historical Cement Price Trend in Northern China Northern China cement price: 1% CAGR in 1997-2010 and up 22. BOCI Research This document may not be distributed in or into the PRC. Historical Cement Price Trend in Southern China Southern China cement price: 1% CAGR in 1997-2010 and up 19% from 1997 to May 2011 (Rmb/tonne) 480 440 400 360 320 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2010 YTD YTD 4 280 Source: Digital Cement.

Historical Cement Price Trend in SW China SW China cement price: 1% CAGR in 1997-2010 and up 10% from 1997 to May 2011 (Rmb/tonne) 460 440 420 400 380 360 340 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 2010 YTD YTD 5 320 Source: Digital Cement.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 6. BOCI Research NW China cement price: 1% CAGR in 1997-2010 and up 21% from 1997 to May 2011 Figure 7. Historical Cement Price Trend in NW China 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Digital Cement. BOCI Research NE China SW China E China NW China This document may not be distributed in or into the PRC. YTD (Rmb/tonne) 460 440 420 400 380 360 340 320 300 280 . BOCI Research Figure 8. Historical Cement Price Trend Comparison (Rmb/tonne) 500 450 400 350 300 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 250 N China S China Source: Digital Cement.

060 1.589 4 1.597 18 15 1.464 4 1. The percentage of total national capacity located in the east dropped from the peak in 2006 (41.93 7.033 10 10 2.357 3 17 1.287 YoY Total YoY growth (%) demand growth (%) 9 709 15 19 810 14 13 932 15 9 998 7 17 1.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Successful Demonstration: Effective Capacity Elimination Leads to Cement Price Hikes As a result of the stringent capacity expansion controls and massive consolidation in eastern China over the past few years.249 14 1.126 2.437 9 2.806 14 1.1% of the total last year.100 20 1.195 8 (2) 2.360 1.66 81-85 86-90 91-95 96-00 01-05 06-10 11-15 E Source: Digital Cement.848 16 10 2.346 8 1. Figure 9. new project investment (which has implications for cement demand) in the east was the highest in the country. BOCI Research Figure 10.327 6 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Source: BOCI Research estimates   This document may not be distributed in or into the PRC.629 1.240 1.16 4.958 8 2. W-shaped Growth Cycle for Cement Production in China % 20 18 16 14 12 10 8 6 4 2 0 18. BOCI Forecasts of Cement Demand and Supply Balance New dry process 17% 24% 34% 42% 48% 54% 62% 70% 77% 85% 90% 96% Total YoY capacity growth (%) 914 8 1.327 2. the growth in cement capacity in the region was much slower that that in the north and southwest.237 14 2.22 12. 6 .14 12.410 5 1.287 (6) Total output 725 862 970 1. However.71 Implying a sharp decline in production growth in 2011-15E 12.320 13 2 1.868 2.388 1. accounting for 27.1%) to around 34% in 2010.173 18 10 1.

with capacity growing at a CAGR of only 6% over the past 5 years (SW China: 21%) m tonnes 600 500 400 300 200 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009 Fujian 2009 2010 2010 2010 7 +11. BOCI Research Figure 12.2% CAGR within 2001-10 0 Zhejiang Shanghai Shandong Hubei Jiangsu Source: Digital Cement. BOCI Research This document may not be distributed in or into the PRC. Capacity Growth in Central China m tonnes 350 300 250 200 150 100 50 0 2001 Anhui Source: Digital cement.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 11.2% CAGR wihtin 2001-10 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 Guangxi Guangdong Source: Digital cement. Capacity Growth in Eastern China Eastern China had the most effective capacity expansion controls among all regions.6% CAGR wihtin 2001-10 2002 2003 2004 Jiangxi 2005 2006 2007 2008 Hunan Figure 13. . Capacity Growth in Southern China m tonnes 200 +10. BOCI Research +15.

Capacity Growth in Western China Cement capacity in SW China expanded at a 22% CAGR in 2005-10 and at a 16.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 14. 8 .9% CAGR within 2001-10 Heilongjiang Figure 16.3% CAGR during in 2001-10. Eastern China Capacity Growth Contracted in 2003-10 Central China NW China SW China Southern China Eastern China NE China Northern China 0% FY10 Source: Digital Cement. BOCI Research Output growth expanding continuously in SW China Output growth contracting continuously in E China 5% 10% 15% FY09 20% 25% 30% 35% FY03 40% This document may not be distributed in or into the PRC. making it the fastest-growing region in the country m tonnes 300 250 200 150 100 50 0 2001 Gansu 2002 2003 2004 2005 2006 2007 2008 2009 2010 Chongqing Sichuan Ningxia Xinjiang +16. Capacity Growth in Northern China m tonnes 140 120 100 80 60 40 20 0 2001 2002 2003 2004 2005 Jilin 2006 2007 2008 2009 2010 Liaoning Source: Digital Cement.3% CAGR wihtin 2001-10 Source: Digital Cement. BOCI Research +12. BOCI Research Figure 15.

N China Beijing Tianjin Hebei Shanxi Inner NE China Liaoning Jilin Heilongjian E China Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong S China Henan Hubei Hunan Guangdong Guangxi Hainan SW China Chongqing Sichuan Guizhou Yunan NW China Shaanxi Gansu Qinghai Ningxia Xinjiang 9 High average cement production per enterprise indicates high market share concentration in the region. thus implying high industry fragmentation Source: Digital Cement.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 17. BOCI Research This document may not be distributed in or into the PRC. Cement producers in such regions should enjoy relatively strong power to negotiate prices 150 100 50 0 . Average Cement Production per Enterprise 250 200 Bars in red are provinces with production per enterprise lower than the national average.

Social Housing Given the government’s extensive investment in social housing (10m units to be constructed in 2011-12 and 36m units during the entire 12th 5-year Plan period) as well as its goal to increase the penetration rate of social housing to 20%.320 1. BOCI Research This document may not be distributed in or into the PRC. With reference to last year and the central government’s mounting determination to increase social housing supply in China. 10 .320 2011E 2012E Note: Assuming 60sqm per unit and a GFA construction cost of RMB2. Total Investment Plan for Social Housing (2009-11E) Investment amount (RMB bn) YoY growth Construction starts (m units) Source: MOHURD.8 2011E 1. The government’s Document of Objective Responsibility stipulates that construction of all targeted affordable housing units must commence before 31 October 2011. which would spur cement demand by only 2-4% per year during the period. MOHURD. assuming an 80% achievement rate in our base case. Social Housing Market Volume Trend RMB bn 1.400 1. representing 5% of China’s total fixed asset investment (FAI) in 2010. which will provide a marked boost to cement demand in the following months. we believe cement demand will be boosted by 3-7% per year during 2011-13. we believe an 80% achievement rate is highly possible. We also consider a bearish scenario with an achievement rate of only 50%.3trn for related projects.200/sqm Source: State Council.000 800 600 400 200 0 2008 2009 2010 132 396 786 1. BOCI Research 2009 384 20% 3 2010 816 113% 5.300 59% 10 12th 5YP 5.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 STRONG DEMAND PULL 1.000 N/A 36 Figure 19. This year.200 1. the government has budgeted around RMB1. Figure 18.

8% (m tonnes) Public housing Shantytown housing Total YoY growth % of total cement consumption % of additional cement demand from the previous year Assuming an 80% achievement rate % of additional cement demand from the previous year Assuming a 50% achievement rate % of additional cement demand from the previous year Source: NDRC.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 20.Scenario Analysis of Cement Demand Impact from Social Housing and Commodity Housing Commodity housing (m sqm) 1. we think the chance for newly started GFA to drop to 802m sqm by 2012 is mild. Figure 21.89 176. Source: CREIS.47 (25.977 18% Cement demand change (m tonnes) (36.3 8. 11 . BOCI Research estimates Can Social Housing Projects Offset the Slowdown in Commodity Housing? Very Likely As shown below.13 252.1% 7. Potential Cement Demand Derived from Social Housing No.7% 1.4% YoY in 4M11. During 1Q11.8% 4. Thus. the property sector refuses to slow despite the central government’s austerity measures. BOCI Research This document may not be distributed in or into the PRC.63) 30% 45 45 24 50% 75 75 40 70% 105 105 56 80% 120 120 64 100% 150 150 80 *Hit hard by the financial crisis.473 1.6% 71 120 120 64 4. the commodity housing newly started GFA was 920m sqm during 2H09. further slowdown in 2012 by: 10% 1.0% 3.9% 44 75 75 40 2.637 GFA/ unit (sqm) 100 unit (m units) 16 Cement demand from commodity housing (m tonnes) 360 Total cement consumption in China (m tonnes) 1.04) Commodity property floor space newly started in 2010 % of total cement consumption in 2010 Assuming slowdown in 2011 by: 10% 30% 1.4% 5. commodity housing GFA starts grew 23% YoY.10 Assuming.031 30% 802 Cement demand from social housing in 2011-13E Achievement rate 2011E 2012E 2013E 100 100 10.7 11.5% 6.8 10 GFA (sqm) Cement consumption per unit per GFA (kg/sqm) (b) (c) 2013E 3 2 10 60 80 5.4% 3.21) (75. it could offset a 30% fall in GFA starts for commodity housing each year.8% 3.5% 5. of units (m) (a) 2010E 2011E 2012E 3 6 6 2.8 4 4 5.6% 8. Having said that. after 30% drop in 2011.146 100 100 14.0 226. while property sales in terms of GFA rose 6.1H10. we believe that if the social housing achievement rate is above 70% this year and 50% next year.3 220 220 Total cement consumption =(a)*(b)*( c)/1000 2010E 2011E 2012E 2013E 40 79 79 42 49 70 70 38 89 150 150 80 68% 0% -47% 4.5 324.4% 6.01) (108.9% 2.8% 7.

 BOCI Research  Who will Benefit the Most from Social Housing? Anhui Conch should be the biggest beneficiary under the social housing theme. Also. Shanshui Cement’s expansion plan in Xinjiang should raise its exposure to the social housing market in the future. we have found that Anhui Conch. Newly Started GFA for Commodity Housing (2006-1Q11) Source: CREIS. it should enjoy little from social housing.200 1. with its 33% exposure. We multiply the incremental social housing unit target in 2011 by 70sqm and 220kg cement/sqm. NE.400 1. should be the biggest beneficiaries under the massive social housing construction plan. This document may not be distributed in or into the PRC. by considering each company’s exposure to real estate. we identify the largest beneficiary of social housing construction by comparing each company’s total cement demand (Column A) within its major markets. 2M06 5M06 8M06 11M06 3M07 6M07 9M07 12M07 4M08 7M08 10M08 2M09 5M09 8M09 11M09 3M10 6M10 9M10 12M10 m sqm YoY growth 1.800 1. Shaanxi (NW). an assumption consistent with that in Figure 21. we see more aggressive targets in the north. While West China Cement has no exposure to the real estate market. we calculate each province’s incremental cement demand growth in 2011 driven by social housing. Moreover. In terms of provinces. Chongqing (SW). Going forward. In terms of regions. As shown in the figure below. Heilongjiang (north).China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 22.600 1. Inner Mongolia (north) and Hunan (central) are ranked the top 5 in terms of social housing construction targets. NW and SW.000 800 600 400 200 - 80% 60% 40% 20% 0% -20% -40% 12 .

33 2.88 5.39 0.43 0.15 YoY growth (%) 297 66 148 43 50 14 4 (5) (2) (4) (12) ( C ) Actual cement demand in 2010 (m tonnes) 74.51 3.9 112.70 2.93 6.85 4.52 0.5 147.443 0.14 5.26 0. BOCI Research This document may not be distributed in or into the PRC.13 0.38 0.5 0.54 10.5 78.49 2.94 3.16 0.8 53.83 4.6 87.36 0.19 0.76 1.34 2.77 5.69 0.93 2.75 0.38 0.35 0.74 3.266 0.29 0.93 2.7 132.6 0.68 2.20) 3.17 0.14 0.34 1.69 25 71 201 66 133 43 50 20 (5) (2) 2 4 4 4 4 4 3 2 2 7 3.1 0.88 4.93 3.66 17.71 0.77 2.85 1.16 5.6 115.24 0.5 62.25 0. 13 .54 10.93 8.31 0.20) (0.25 0.31 18.75 4 3 2 2 1 1 0 0 (1) (1) (1) 2011 2010 target (m units) (m units) Anhui Conch Guangxi Hunan Guangdong Zhejiang Jiangsu Anhui Sichuan Jiangxi Heilongjiang Chongqing Gansu Sum of major markets CNBM Shanghai Jilin Henan Hunan Hebei Zhejiang Jiangsu Shandong Jiangxi Heilongjiang Sum of major markets Shanshui Cement Xinjiang Liaoning Inner Mongolia Shanxi Shandong Sum of major markets CR Cement Fujian Guangxi Guangdong Hainan Sum of major markets WCC Shaanxi 0.21 0.6 *Shaded provinces are the major markets for each cement companies.40 0.269 0.99 3.08 0.31) 6.71 0.84 5 4 2 1 57.28 0.20) (0.23 0.421 0.447 0.23 0.0 147.85 4.2 35.19 68 64 15 11 20 3 3 5 3 2 4.34 2.14 255 297 148 7 3 3 3 1 4.88 0.1 46.68 10 7 4 3 3 2 1 0 0 (1) 3 6.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 23.23 (0.62 2.74 2.45 0.63 0.21 0.0 125.08 8.32 0.9 74.21 0.7 33.30 4.073 0.8 156.32 0.07 0.2 35.13 0.4 112.16 0.0 24.31 0.82 6.39 6.05 0.34 0.47 4.47 152 5 7.3 62.38 0.48 6.16 4.27 0. We believe Anhui Conch should benefit the most under the social housing theme Source: MOHURD.54 7 4 2 1 0 23.66 7.85 0.20) (0.34 2.00 5. Social Housing Targets by Province and Companies with Exposure (B) (A) Potential Potential Incremental incremental cement cement demand cement demand demand from in 2011 driven growth in 2011 social housing by social driven by social % of in 2011 housing housing (%) total (m tonnes) (m tonnes) (= B/C) 3 4 3 4 3 4 4 2 7 5 2 4.49 (0.27 0.16 1.85 5.31) (0.34 0.93 4.13 0.47 6.7 39.243 0.27 0.16 0.8 156.0 115.63 0.4 12.18 0.7 47.24 6.76 1.5 0.45 0.22 0.8 87.19 0.29 0.40 8 54.16 0.1 0.7 114.259 0.

accelerated urbanisation should continue to drive cement demand via water conservancy projects and infrastructure upgrades. We estimate that urbanisation has driven up annual GDP by 0. Quarterly Total Newly Started GFA and YoY Growth (3Q04-4Q10) (m sqm) 4.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 24. Huge Potential for China’s Urbanisation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Cumulative GFA newly started (LHS) YoY growth (RHS) 90% 82% 82% 80% 77% 74% 67% 43% UK US South Korea Canada France Germany Japan China Source: WIND database. Among related companies.000 1.000 2. We have cross-checked the construction activities with the demand for building machinery. BOCI Research This document may not be distributed in or into the PRC. Figure 25. BOCI Research 2. 14 .500 2. and found that the sales volume of wheel loaders was up by 45% and that of excavators by 58% YoY during 1Q11.7% on average over the past 10 years.000 3.500 1. Rapid Urbanisation Urbanisation has been very important in stimulating overall cement demand. we believe CNBM should benefit the most from urbanisation as it has large exposure in rural areas.000 500 0 80% 60% 40% 20% 0% -20% Source: WIND database. During the 12th 5YP period.500 3.

Shanxi Council for the Promotion of International Tourism on Hainan Hainan Island Demonstration Zone Plan for the City-cluster along the Yangtze Anhui River in Anhui Chongqing “Two Rivers” New Area Chongqing Source: Xinhua News Agency.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 26. 15 . China’s Latest Regional Development Plans Time of proposal Jan-08 Mar-08 Dec-08 Jan-09 Mar-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Dec-09 Dec-09 Dec-09 Dec-09 Jan-10 Jan-10 Names Region Development Plan for Guangxi Beibuwan Economic Zone Guangxi Overall Plan of Coordinated Reform in Tianjin Binhai New Area Tianjin Outline of the Plan for the Reform and Development of the Pearl Guangdong River State Council Opinions on Promoting Urban and Rural Reform Chongqing and Development in Chongqing Building Shanghai as International Shipping Center and Financial Shanghai Center State Council Opinions on Supporting Fujian Province in Building Fujian the West Coast Economic Zone on the Taiwan Strait Development Plan of Coastal Area in Jiangsu Jiangsu Liaoning Coastal Economic Zone Development Plan Liaoning Outline and Development Plans of Tumen River Region Jilin Outline of Plan to Boost Development of Central China Central region Efficient Ecological Economic Zone Development Plan for Yellow Shandong River Delta Poyang Lake Ecological Economic Zone Plan Jiangxi Circular Economy of Gansu Province Master Plan Gansu. BOCI Research This document may not be distributed in or into the PRC.

2m tonnes of outdated capacity in 2011. Hunan and Shanxi should be the provinces with more rapid capacity elimination. Guangdong. by the end of the 12th 5YP period. Provinces like Hebei. outdated capacity elimination will continue. Hunan. Considering the cement companies’ capacity allocation. boding well for Anhui Conch. accounting for 20-28% of their respective cement capacity in 2010. and (iii) emission of nitrogen oxide and carbon dioxide by 25% from 2009. Hunan will be particularly affected. which in general provide 20-25% self-sufficiency for cement production. Guangdong’s government is planning to remove all outdated capacity by end-2012. 16 . Guangdong.6m tonnes. During 2010. Shanxi. We believe the MIIT’s capacity elimination targets are achievable taking reference of the track record. Guangdong. Liaoning and Zhejiang will be the key provinces. especially during the upcoming summer months. As such. the oversupply in China could possibly turn into a shortage. boding well for CNBM and Shanshui Cement Capacity Elimination and Energy saving has always been on top of the Chinese government’s agenda. Moreover. Also. In 2009. Large Cement Companies to Benefit Most from Power Rationing We think power rationing is positive to large-sized cement companies as: (i) they enjoy higher pricing power on lower supply. Hunan and Shanxi set to be the key provinces for cement capacity elimination. The Shanxi government also announced a plan to eliminate 13. Shandong.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 MORE CAPS ON SUPPLY SIDE Accelerating Outdated Energy-saving Target Shandong. Again. (ii) emission of particulate matters (PM) by 50% from 2009. we believe large companies in central and eastern China should benefit the most as cement production in these regions could be severely affected. Shanxi and Shandong were the top 5 provinces with most capacity elimination. we believe all outdated capacity should be eliminated by end-2013. we believe CNBM and Shanshui Cement should be the biggest beneficiaries. 46% higher than in 2010. Sichuan. According to the government’s schedule. and (ii) power rationing would have minimal impact on their production schedules given that most large-sized cement companies utilise residual heat generation facilities. MIIT has recently revised up its obsolete cement capacity elimination target from 100m tonnes to 133. RMB1bn out of the RMB40bn net profit made by the cement industry resulted from the installation of residual heat generation. MIIT aims to lower (i) the coal consumption per tonne to less than 93kg. representing 20% of the total existing capacity. This document may not be distributed in or into the PRC. Overall. we believe these measures will benefit big players as well to enhance the whole sector’s profitability.

BOCI Research Figure 29. east and south China were all over 50%.400 1.200 1. BOCI Research m tonnes 1. Market Share Concentration Rates in China % 70 60 50 40 30 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Top 10 Source: Digital Cement. respectively. while those for the NW and SW were lower at 38% and 30%. BOCI Research Top 20 As of 2010. This document may not be distributed in or into the PRC. NE. New Dry Processing Capacity Ratio in China 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Digital Cement. New Dry Processing Capacity Growth Trend (2001-10) m tonnes 100 80 60 40 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 Shanxi (LHS) Shandong (LHS) Shaanxi (LHS) Source: Digital Cement. 17 .000 800 600 400 200 2010 Zhejiang (LHS) Guangdong (LHS) Xinjiang (LHS) Anhui (LHS) Guangxi (LHS) National (RHS) Figure 28.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 27. the top 20 cement enterprises’ concentration ratios in north.

the investment in railway construction could slow after next year if the Ministry of Railways’ loss-making situation persists (MOR reported a RMB3.9% increase from the current level.000 20. Negative YoY growth in number of new project starts compared with April 2010. BOCI Research 100. in our view. of project starts (LHS) Source: WIND database. thus threatening WCC and Sinoma the most. We believe the negative YoY growth of FAI in new project starts for 1Q11 could be an early warning for the future fixed asset investments.000 80.358km to 13. representing 32% growth.000 50.8bn tonnes by 2015. the first drop since 2003 Figure 30.000 20.8% expansion. the YoY growth in total new project starts in China. representing a 45. 18 .000 02/04 06/04 10/04 03/05 07/05 11/05 04/06 08/06 12/06 05/07 09/07 02/08 06/08 10/08 03/09 07/09 11/09 04/10 08/10 12/10 No. Moreover.000 40. Yet. Officials have already denied rumours that the Ministry of Railways would trim its railway construction budget this year from RMB700bn to RMB400bn. by 2015.000 30.76bn loss in 1Q11). According to the NDRC.800km.000km under construction.000 40. representing 41. Meanwhile. This has negative implications on cement prices in the longer term. which threatens WCC and Sinoma the most in our view. The total length of railways should increase from 91. As such. and we see more room for improvement in SW China (30%) By the end of the 12th 5YP period. The total port capacity should reach 7. NE China and northern China. China’s Number of Project Starts (by month) and Increase in Project Starts Compared to the Same Period Last Year 60. and high-speed railways should reach 45. has also been falling this year since April last year as shown in the figure below.000 10. During 2010.000km. the total investment in railways amounted to RMB709bn. we also notice a decline in new project starts by 32-40% YoY during 1Q11 in several regions like SW China.000) (40. The total length of railways in western China should reach 50. with more than 30. While we think the budget this year will not be cut. we will need a more long-term trend to confirm its validity.000km.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Worries over Slowdown in Railway Construction Concentration ratio remained high throughout the past decade.000km.000 60. the projects under construction would not be called to a stop. Western China would be affected most considering the aggressive railway development. Slowdown in New Project Starts in a Few Regions Be cautious on the slowdown in new project investment growth. the total length of high-speed railways is expected to increase from 8. another indicator for construction. which has negative implications on cement prices later next year While we believe demand will stay strong in the near term.000) 0 Increase in project starts (RHS) This document may not be distributed in or into the PRC. In 2011.000km in length. the total length of highways should reach 100. Western China would be affected the most considering the aggressive railway development. and high-speed railways. the Chinese government targets growth of at least 40% for the transportation network.000 0 (20. highways and ports will be the major focuses.000km to 120.

03/97 09/97 04/98 10/98 05/99 11/99 06/00 12/00 07/01 02/02 08/02 03/03 09/03 04/04 10/04 05/05 11/05 06/06 12/06 07/07 02/08 08/08 03/09 09/09 04/10 10/10 New project start YoY growth (LHS) Urban FAI growth (RHS) 02/11 60 50 40 30 20 10 0 19 120.000 80. Similar Trends of FAI Growth and New Project Start Growth % 120 100 80 60 40 20 0 (20) (40) Source: WIND database. Relationship between Urban FAI and FAI in New Project Starts (RMB m) 300.000 10. BOCI Research Due to delays in the accounting of new project starts in urban FAI figures.000 200.9737 2 Source: Digital Cement.000) .000 100.000 250.000 25.331x + 61. Increases in Number of New Project Starts and Number of Projects under Construction 02/04 08/04 02/05 08/05 02/06 08/06 02/07 08/07 02/08 08/08 02/09 08/09 02/10 08/10 % Increase in number of projects starts Increase in number of projects under construction Source: Digital Cement. As a result. Figure 32.000 100.000 60.000 0 0 5.593 R = 0. the R2 is as high as 0.000 15.000 y = 12.000 50. BOCI Research Figure 33.000 0 (20.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 31.000 150.000) (40. BOCI Research This document may not be distributed in or into the PRC. we seek to find out the correlation between the two variables by assuming a one-year lag time.000 40.000 20.96 using the data between 1997 and 2011.000 20.

Sichuan. Jilin. Shanxi and Shandong. BOCI Research 0% 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% FAI growth (RHS) This document may not be distributed in or into the PRC. Anhui Conch and CNBM should be the safer investments given their exposure. On the other hand. while the weakest links would be Sichuan and Inner Mongolia. provinces that recorded more than 40% YoY decline in new project growth were Ningxia.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Strong Momentum Remains in Eastern China In terms of new project starts. Although both Shanshui and Conch have exposure in these provinces as well. Fujian. Guizhou. Inner Mongolia. namely Anhui and Shandong. Anhui. the latter’s exposure is relatively small compared to its exposure in the provinces recording high project start growth. Figure 34. If the number of new project starts is the leading indicator for future FAI growth and thus future cement demand. Liaoning and Henan. New Project Start Growth in 1Q11 by Province 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% N China Beijing Tianjin Hebei Shanxi Inner Mongolia NE China Liaoning Jilin Heilongjiang E China Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong S China Henan Hubei Hunan Guangdong Guangxi Hainan SW China Chongqing Sichuan Guizhou Yunan Tibet NW China Shaanxi Gansu Qinghai Ningxia Xinjiang -100% Source: Digital Cement. regions like eastern China still registered robust YoY growth of 44%. Beijing. Anhui’s FAI Growth and New Project Start Investment Growth Anhui accounts for over 55% of Anhui Conch’s total capacity 140% 120% 100% 80% 60% 40% 20% 2M09 3M09 4M09 5M09 6M09 7M09 8M09 9M09 10M09 11M09 12M09 2M10 3M10 4M10 5M10 6M10 7M10 8M10 9M10 10M10 11M10 12M10 2M11 3M11 New project start investment (LHS) Source: Digital Cement. BOCI Research Figure 35. where Sinoma has the largest exposure among peers. 20 . Specific provinces with positive growth were Gansu.

Shandong’s FAI Growth and New Project Start Investment Growth Shandong accounts for more than 70% of Shanshui Cement’s total capacity and 14% of CNBM’s total capacity 100 % 80 % 60 % 40 % 20 % 2M09 3M09 4M09 5M09 6M09 7M09 8M09 9M09 10M09 11M09 12M09 2M10 3M10 4M10 5M10 6M10 7M10 8M10 9M10 10M10 11M10 12M10 2M11 3M11 New project start investment (LHS) Source: Digital Cement. BOCI Research 35% 30% 25% 20% 15% 10% 5% 0% -50% FAI growth (RHS) Figure 37. BOCI Research 0% 24% 23% 22% 21% 20% 19% 18% 17% 16% FAI growth (RHS) Figure 38. BOCI Research This document may not be distributed in or into the PRC. accounting for 27% of its total capacity 200% 150% 100% 50% 0% 2M09 3M09 4M09 5M09 6M09 7M09 8M09 9M09 10M09 11M09 12M09 2M10 3M10 4M10 5M10 6M10 7M10 8M10 9M10 10M10 11M10 12M10 2M11 3M11 New project start investment (LHS) Source: Digital Cement. Zhejiang’s FAI Growth and New Project Start Investment Growth Zhejiang is the largest sales market to CNBM. 2M09 3M09 4M09 5M09 6M09 7M09 8M09 9M09 10M09 11M09 12M09 2M10 3M10 4M10 5M10 6M10 7M10 8M10 9M10 10M10 11M10 12M10 2M11 3M11 New project start investment (LHS) 60% 55% 50% 45% 40% 35% 30% 25% 20% FAI growth (RHS) 21 .China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 36. Guangxi’s FAI Growth and New Project Start Investment Growth Guangxi accounts for over 50% of CR cement’s total capacity and 12% of Anhui Conch’s total capacity 150% 100% 50% 0% -50% Source: Digital Cement.

China Cement Sector
Industrials – Basic Materials Michelle Leung 25 May 2011

Figure 39. Shaanxi’s FAI Growth and New Project Start Investment Growth

Shaanxi accounts for 100% of West China Cement’s capacity

10M10

11M10

12M10

2M10

3M10

4M10

5M10

6M10

7M10

8M10

9M10

2M11

New project start investment (LHS)
Source: Digital Cement, BOCI Research

FAI growth (RHS)

Figure 40. Summary of Positives and Negatives for Cement Sector
1) Positives Negatives Power shortage/rationing - we think it will be Slowdown in new project starts could more severe during summer, boding well for threaten cement demand cement prices Rapid urbanisation Easing impact from the RMB4trn stimulus package Demand from social housing (Budget: Worries over the government’s funding for RMB1.3trn) infrastructure projects Demand from water projects (Budget: National property sales (GFA) contracted RMB400bn/year for 10 years, doubling the by 10% YoY in April 2011 and saw 6.4% budget in 11th 5YP) YoY growth in 4M11, a significant slowdown compared to 4M10’s 32.8% YoY growth Demand from high-speed railways (Budget: RMB700bn/year and RMB3.5trn throughout 12th 5YP) Demand from highways (Total budget over RMB10trn over 12th 5YP, compared to RMB7.7trn in 11th 5YP) Housing FAI remained high at 34.1% in 1Q11

2) 3) 4)

5)

6)

7)

Source: BOCI Research

This document may not be distributed in or into the PRC.

3M11

80% 60% 40% 20% 0% -20% -40% -60% -80%

34% 33% 32% 31% 30% 29% 28% 27%

22

China Cement Sector
Industrials – Basic Materials Michelle Leung 25 May 2011

PROVINCIAL ANALYSIS
Our Favourite Regions for Cement Exposure
We have created a matrix putting all our demand/ supply analyses in one table to select our favourite regions based on six criteria, categorised by (i) potential in consolidation and (ii) improving demand and supply dynamics. In conclusion, we favour eastern and southern China most. Please see the figure below for our ranking of each province.

The six criteria are: 1) 2) 3) 4) 5) 6) % of new dry process lower than the national average of 75% Clinker capacity per capita of more than 1,000kg Average production per enterprise lower than the national average Higher urban FAI growth than the national average Higher housing FAI growth than the national average Higher-than-average new project start growth

This document may not be distributed in or into the PRC.

23

China Cement Sector
Industrials – Basic Materials Michelle Leung 25 May 2011

Figure 41. Matrix for Preferred Province Selection
Average production/ enterprise 89 128 117 103 43 54 75 43 134 48 136 192 138 136 137 124 116 111 133 128 147 70 109 101 243 103 119 131 63 100 NA 65 100 64 81 37 46 105 Clinker capacity per capita 441 296 1,093 1,116 1,717 1,076 762 316 74 986 1,388 1,676 1,135 1,125 1,361 930 1,048 1,138 1,138 1,277 1,117 1,649 1,389 927 959 840 1,162 815 1,026 2,379 1,292 1,105 1Q11 Cement FAI growth (%) (30.8) NA 23.7 (28.6) (22.4) (49.9) (16.7) (21.2) 72.1 (44.9) 7.1 NA 27.7 (22.9) 29.5 40.3 4.3 (35.5) (35.6) (60.3) (47.6) (26.8) (62.8) 39.0 (98.7) (30.6) 2.2 (44.1) (40.9) 64.6 NA (19.4) (27.5) (38.9) 273.7 22.0 (40.5) (23.5) 1Q11 urban FAI growth (%) 6.0 11.9 29.0 26.7 25.1 20.5 11.8 30.3 31.4 18.8 16.9 (7.4) 23.1 26.6 34.3 32.9 33.4 21.2 16.2 27.9 33.2 31.5 13.6 32.0 34.0 21.3 20.0 24.3 48.9 20.5 57.9 19.6 28.2 41.6 40.6 41.3 15.4 25.0 Beneficiaries from 1Q11 housing Beneficiaries Beneficiaries 1Q11 New FAI growth project growth from social from transportation (%) (%) housing waterway network 29.5 (31.5) 14.0 (59.3) X X 25.4 (15.2) X 59.4 (27.1) 31.7 21.0 X X 53.2 (56.9) X 29.4 (37.1) 29.7 (48.1) X 28.1 66.2 X 23.4 (26.1) X 34.1 119.3 11.3 2.7 X X 33.9 (0.7) X 34.3 20.6 49.7 52.6 X X 52.7 38.3 20.2 (31.4) 37.2 23.4 X 32.2 (23.7) 35.7 (45.6) X 43.7 (32.7) X 34.6 (22.2) 28.5 (3.2) X 21.4 (23.8) 35.6 (35.6) X 44.5 (39.7) 43.4 (31.8) X 36.0 (53.5) 99.3 (53.3) X 39.9 (8.3) X 48.7 25.6 X 31.8 2.4 26.9 (20.2) X 43.3 97.4 X 28.0 (18.6) X 29.1 (77.7) X 79.4 (26.6) X 34.1 (12.1)

National N China Beijing Tianjin Hebei Shanxi Inner Mongolia NE China Liaoning Jilin Heilongjiang E China Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong S China Henan Hubei Hunan Guangdong Guangxi Hainan SW China Chongqing Sichuan Guizhou Yunnan Tibet NW China Shaanxi Gansu Qinghai Ningxia Xinjiang National average

* Shaded in pink - favoured provinces * Least favoured provinces - Shanghai, Ningxia, Inner Mongolia, Qinghai, Yunnan Source: Digital Cement, BOCI Research

Figure 42. Regional Scores
Average production/ enterprise 4 5 1 2 3 6 1Q11 1Q11 cement FAI 1Q11 urban housing FAI growth FAI growth growth 2 6 5 5 5 6 6 3 2 1 4 3 3 1 1 4 2 4 1Q11 new project Total growth score 4 21 5 26 1 13 3 13 6 14 2 18

N China NE China E China S China SW China NW China

Source: Digital Cement, BOCI Research

This document may not be distributed in or into the PRC.

24

0 8.13 8.24 8.91 9.53 8.2 10.04 6.93 9.78 9.52 7.11 8.0 4. 25 .5 7.6 2.HK Sinoma 1893.9 9.HK 2.21 10.67 6.6 66.57 *Shaded in orange ‐ peak seasons.1 11.5 SW China Total Exposure in our favoured provinces *Favoured province Source: Company data.07 5.4 15.7 9.4 9.24 9. are our most preferred regions. BOCI Research  Cement demand has been relatively stable throughout the year in eastern China without significant seasonal fluctuations.46 9.6 50% 48.2 Central China Southern China NW China 3m by 2012e 1.61 8.0 1. Based on our matrix selection.7 5.99 5.61 8.7 10.56 9.75 9.46 5.32 10 10.6 13.57 4.65 8.0 2.HK 7.02 7.0 72.9 5.64 Eastern 5.HK 56.8 7.39 8.0 8.23 North 3.92 7.35 8.64 8.5 8.0 5.8 9.32 9.06 3.31 8.62 3.84 9. while NE China is our least favoured.6 14.05 8.0 China Resources Cement 1313.8 12.1 4.18 NE 2.54 8.64 42.0 1.0 48. Approaching 2Q. Figure 44.67 11.2 5.0 24.7 9.0 7.3 10.5 0% This document may not be distributed in or into the PRC. BOCI Research 70.4 42% 15.7 10.64 NW 3.02 10.0 2.75 7.0 22.4 4.15 9.5 SW 7. more rapid ramp-up in demand should be found in NE and NW China.61 8. which both have the lowest scores in the figure above.03 8.52 10.8 CNBM 3323.86 11.84 8.5 8.35 6. eastern China and southern China.0 13.7 2.86 9.92 8.97 8.03 8.33 8.4 25.39 Southern 6.86 12.18 9.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 43. Seasonality by Province (% of full-year demand) (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec National 5.7 10.0 24.18 7.6 5.0 13.HK Stock code Eastern China 1 (10m by 2011E) N China 12.5 37% 12.0 4.65 9. Cement Companies’ Coverage by Province Shanshui Cement 691.87 7.0 150 59% 200. shaded in grey ‐ low seasons  Source: Digital Cement.1 28.2 15.99 9.92 9.0 4.5 72% 2.52 10.7 10.13 6.65 9.32 9.HK Zhejiang Jiangsu Shanxi Shanghai Fujian Shandong Henan Beijing Hebei Liaoning Inner Mongolia Anhui Hunan Jiangxi Guangdong Guangxi Hainan Hubei Xinjiang Gansu Qinghai Jilin Shaanxi Ningxia Sichuan Heilongjiang Chongqing Anhui Conch 914.2 1.0 3.6 West China Cement 2233.

we rank the cement companies using our 2010-13E CAGR in sales volume. We rank each dynamic from 1 to 5 and the company with lowest score is the most preferred. BOCI Research 2007 66 29 36 70 73 2008 58 35 52 62 88 2009 60 35 47 79 127 2010E 80 56 51 106 118 2011E 116 110 94 114 112 2012E 121 116 95 122 115 2013E 128 125 100 129 122 CAGR (2010-13E) 17% 31% 25% 7% 1% Ranking 3 1 2 4 5 Figure 48. BOCI Research CNBM China Resources Cement This document may not be distributed in or into the PRC. Sales Volume Forecasts Sales volume Anhui Conch CNBM Shanshui Cement China Resources Cement West China Cement Source: Company data. 26 .China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 PEER COMPARISONS In the figures below. Figure 45. BOCI Research 2009 110 160 48 29 8. Gross Profit per Tonne Trend (RMB/tonne) 150 100 50 0 2006 2007 2008 2009 2010 2011E Anhui Conch Shanshui Cement West China Cement Source: Company data. Gross Profit per Tonne Gross profit per tonne Anhui Conch CNBM Shanshui Cement China Resources Cement West China Cement Source: Company data. tonnage gross profit and net profit. Cement Capacity Forecasts Cement capacity Anhui Conch CNBM Shanshui Cement China Resources Cement West China Cement Source: Company data.5 2010 150 204 67 48 12.5 2011E 2012E 2103E CAGR 177 210 235 16% 236 266 286 12% 82 90 100 14% 62 78 84 21% 17 18 24 24% Ranking 3 5 4 2 1 Figure 47. BOCI Research 2009 118 113 38 19 5 2010 137 153 49 33 10 2011E 2012E 2103E CAGR 170 212 235 20% 202 238 257 19% 60 66 74 15% 50 64 69 28% 14 16 18 22% Ranking 3 4 5 1 2 Figure 46.

697 1.0% 0.124 9.719 1.041 998 2011 12.0% 1.302 2013 19.983 1. Net Profit Growth Forecasts Net profit growth Anhui Conch CNBM Shanshui Cement China Resources Cement West China Cement Source: Company data. BOCI Research Figure 51.570 6.707 3.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 49. Comparison of Companies’ Downstream Exposure Downstream exposure Real estate Infrastructure Rural area Distributors Ready mix Anhui Conch 33% 40% 27% CNBM 15% 40% 45% Shanshui Cement 33% 20% 18% 28% China Resources Cement 20% 50% 30% West China Cement 0% 44% 10% 39% 7% Whole sector 30% 40% 30% Source: Company data.0% 0.0% CNBM Shanshui Cement West China Cement China Resources Cement Shanshui Cement This document may not be distributed in or into the PRC.0% 0.0% CNBM CNBM Asia Cement 10.0% 5.5% Asia Cement 1.405 3. 27 .0% West China Cement China Resources Cement Source: Company data. BOCI Research Northern China Anhui Conch 4. Market Share Comparisons (based on 2010 cement capacities) Eastern China Anhui Conch 15.0% 5.0% Asia Cement 10.0% 1. BOCI Research 2010 6.0% 20.229 2.0% West China Cement China Resources Cement Shanshui Cement West China Cement China Resources Cement Central China Anhui Conch 15.742 979 2.5% 0.0% 0.0% Southern China Anhui Conch 30.607 CAGR 46% 36% 53% 41% 17% Ranking 2 4 1 3 5 Figure 50.0% China Resources Cement Shanshui Cement Shanshui Cement CNBM SW and NW China Anhui Conch 2.0% 0.128 2012 16.0% 3.0% Asia Cement 10.349 2.531 5.0% CNBM Asia Cement 2.163 3.209 8.976 4.

4 P/B (x) 2010 2011E 2012E 4.9 1.9 8.7 1.2 2.2 1. Valuation Comparison Company Anhui Conch BBMG Corp CNBM CR Cement China National Material Shanshui Cement West China Cement Asia Cement (China) HK listed peers Source: Bloomberg.5 17.1 7.9 6.7 6.9 14.4 6. we think CNBM is more a long term buy given its attractive valuation and leading position in China.777.1 18.4 1.1 3.7 5.8 9.1 9.1 2.28 78.56 14.3 2.3 7. we rank Anhui Conch our top pick given its outstanding performance in every aspect.64 Mkt cap 152.96 22.2 2. We also like its large exposure in Eastern China.5 2.048.9 17.89 13.4 2.0 3.0 17.8 15.7 17.2 6.1 2.0 8.10 24.5 9.5 12.0 0.8 7.8 13.58 7.6 2.2 6.718.9 37. While Shanshui Cement and CNBM score the same.12 6.4 6.8 1.4 10.5 3.0 EV/EBITDA (x) 2010 2011E 2012E 15. 28 .3 10.0 12.8 20. Scorecard for Cement Companies Anhui Conch 3 3 2 1 3 12 CNBM 4 1 4 2 2 13 Shanshui Cement 5 2 1 4 1 13 CRC 1 4 3 3 5 16 West China Cement 2 5 5 5 4 21 Sales volume growth GP/tonne Net profit growth Market share Valuation Total score *Lowest score is most preferred Source: BOCI Research According to our scorecard.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 Figure 52.1 17. For Shanshui Cement.0 10.00 46.94 7.93 8.2 11.2 10. some discount should be imposed given its low liquidity.785.25 2010 15.3 5.0 12.30 10. However.5 9. We see buying opportunities emerging again after the recent share price correction.8 3.249.2 9.0 ROE (%) 2010 17. we think the street has been underestimated its strong earnings growth.0 P/E (x) 2011E 2012E 11.3 6.017.00 63.7 22.5 15. BOCI Research Stock code 914 HK 2009 HK 3323 HK 1313 HK 1893 HK 691 HK 2233 HK 743 HK Ccy HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ Price 31.4 9.4 16.4 10. Our Ranking of Cement Stocks 1 2 3 4 5 Company Anhui Conch CNBM Shanshui Cement China Resources Cement West China Cement Source: BOCI Research This document may not be distributed in or into the PRC.6 2.4 3.83 3.5 14.3 Figure 53.3 4.5 2. Figure 54.7 8.1 3.9 7.2 5.11 5.9 5.9 0.3 7.5 1.2 6. trading at the lowest valuation among cement plays.2 5.4 8.1 2.6 7.8 13.9 9.417.6 8.9 1.7 5.257.8 10.

Bloomberg data.0% NA 3.508 38. As the second largest cement producer in China and one of the country’s most cost-efficient producers.209 3.04 5.350 1. EV/EBITDA and P/E. 2012 P/E of 10.22 8. we expect its net profit to register a 46% CAGR in 2010-13 and believe it will become one of the fastest growing companies in the cement universe.03 12. we think now is a good time to BUY. we believe Conch should trade at a premium to peers. Absolute (%) Relative to HSCEI (%) YTD 28.03 36.76% 27.98 6.9% NA 12-10 34.6x.233 0.25 18. we think this is reasonable given that 1Q11 already accounted for 18% of our full-year forecast and that the first quarters accounted for 9-17% of full-year earnings in 2007-10. cement prices and sales volume.76 0.9x.612 2.9 1M -13.5 29. and believe Conch will sustain its cost advantage Key Highlights of this Report Comparisons showing the company’s efficient cost control.50 18.70.300 0.1% 12-13E 84.81% 31.71 7.70 Anhui Conch Attractive risk/reward with Anhui exposure We initiate coverage on Anhui Conch’s H shares with a BUY rating and a target price of HK$40. its high margin is more likely to remain secure even if cement prices correct.bociresearch.com. We like the company’s dominant position in Anhui. P/E. we use a blended methodology of EV/tonne. 914 HK Price: HK$ 31. BOCI Research estimates. BOCI research is available electronically on Bloomberg (BOCR <go>).08 0.163 1. Given its efficient cost management.34% 30.74 14.7 3M 34.2% 3. we see the company as one of the biggest beneficiaries of social housing construction projects going forward.57 8. Valuation Methodology Source: Bloomberg.2 To value Anhui Conch.506 2. Earnings sensitivity to coal.8 87 5.34% 13.0% Shares outstanding Free float (%) Market cap.3% 1. Taking the average.6% Source: Company data. Despite its large size.3x and 2012 EV/EBITDA of 6. we expect strong earnings growth going forward.61 7.16 9. we value Conch based on EV/tonne of US$110. EV/EBITDA Sector Rating: OVERWEIGHT Where are we Different? Our 2010-13 earnings estimates are 10-14% above consensus as we think ASP has been underestimated.11 7. Attractive Valuation Trading at only 11x 2011 P/E and about US$ 100 EV/tonne.36 6.474 1.51 0.Initiating Coverage 25 May 2011 BUY 30.6 36.0% 6.570 2.06 15.87 22. Moreover.9 -6.9% 3. While our 2011-13 earnings estimates are 10-14% higher than consensus.879 56. Attractive Risk Reward 26-27 May Despite its large size.99 (14. thomsonreuters.0% NA 2. its mid-cycle P/E of 15.859 33.) Net debt / Equity (%) Major shareholder (%) Anhui Conch Holdings Co Ltd BOCI Research Limited China: Industrials Michelle Leung (852) 3988 6431 michelle.998 3.37 11.0 152.0% NA 2.722 2.22 12.com and www.2%) NA 12-11E 53. housing FAI and newly started project growth.5% 19. 10-14% above Consensus Conch should continue to surprise the market with robust earnings growth after 1Q11. Conch’s valuation is at the low end of its historical range. We compare Conch’s cost trends with peers. (HK$ m) Daily turnover (3M avg.124 3.30 TP Basis: EV/tonne.13 23.70 (representing 14.249 12. Closing prices are as of 18 April 2011.8 28. Cement demand driven by social housing in Conch’s major markets.430 17.55 29. which has consistently delivered robust FAI.1% 12.06 8. we derive our target price of HK$40.3x 2011 P/E). Conch should benefit greatly from social housing developments.68 0.89% 19.68 13.2% 4. Key BOCI Event Analyst marketing in Hong Kong Trading Summary H .4% 16. Trading at only 11x 2011 P/E vs.8% 12-12E 71. Using the industry average with a 10% premium.00 4.Anhui Conch (914 HK) 42 37 32 27 22 17 40 12 Vol th 30 20 10 May10 May11 Nov10 Sep10 Mar11 Jul10 Jan11 Price Close Relative to HSCEI (RHS) 241 214 188 161 134 108 81 Figures 8-9 Figure 10 Figure 20 46% Earnings CAGR in 2010-13E. .3 12M 99.leung@bocigroup.03 30% side Target Price: HK$40. which is in line with its mid-cycle P/E valuation. Investment Summary Total turnover (RMB m) Revenue growth Net profit (RMB m) Fully diluted EPS (RMB) FD P/E (x) FDEPS growth Previous EPS (RMB) Consensus EPS (RMB) EPS vs Consensus Recurrent CPS (RMB) P/CF (x) EV/EBITDA (x) Dividend/share (RMB) Dividend yield ROE 12-09 24.6% 3.com 3.84 0.

versus the 9-17% of full-year earnings in 2007-10.4 Bull case Base case Bear case Discount 20% 10% 0% Target multiple 120 110 100 Segmental value (HK$ m) 184.733 Target price 45. While we expect the company’s rapid growth to persist. we value Conch based on EV/tonne of US$110.52 231. We initiate coverage with a BUY rating.942 196.70 (representing 14. Trading at only 11x 2011 P/E and around US$100 EV/tonne. EV/EBITDA and P/E. We like the company’s dominant position in Anhui. housing FAI growth and newly started project growth. Taking the average. we now see a good buying opportunity. In view of its strong financials and proven execution ability.30 Target Price: HK$40. we think our numbers are reasonable as 1Q11 earnings only imply 18% of our full-year estimate.672 151. solid cost control and quality management. 2012 EV/EBITDA of 6.34 7. Valuation Table HK peer average 100 Bull case Base case Bear case 6. which is among our most favoured provinces in terms of consistently high FAI growth. upgrades may be imminent.8 Bull case Base case Bear case Source: Company data. Using the industry average with a 10% premium. we believe the company should deliver promising earnings growth. we think Conch will be one of the biggest beneficiaries of social housing projects given its sales market layout and high exposure to real estate (33% in 2010).Anhui Conch BUY Michelle Leung Price: HK$31. Figure 1. Moreover.22 10. Anhui Conch is our top pick in the sector given its high market share in its existing markets. To value Anhui Conch. Given our belief that the street has underestimated its earnings.56 6. we derive our target price of HK$40.3x.7 32.3x 2011 P/E).3 Bull case Base case Bear case 9. which would provide a further share price catalyst. we employ a blended methodology of EV/tonne. 30 . we think its risk-return profile is the most attractive among peers.9 40.70 25 May 2011 VALUATION While our estimates for Conch’s 2011-13 earnings are 10-14% above consensus.258 142. BOCI Research This document may not be distributed in or into the PRC.93 5.9x and 2012 P/E of 10.144 EV/tonne (US$/tonne) 2012 EV/EBITDA 20% 10% -10% 7.413 151.586 2012 P/E 30% 10% -20% 12.67 206.827 188.200 167. which is still in line with Conch’s mid-cycle P/E.

Leading position should make the company one of the major beneficiaries under the industry consolidation theme Dominant position in Anhui Strong financials with low leverage and abundant cash flow Quality management Opportunities Cement price growth potential in SE China New development in SW China should benefit the company under the Western China Development Plan Adverse impact from property market should be mitigated by the aggressive social housing construction plan in Anhui Source: BOCI Research estimates Weaknesses Approximately 25% exposure in property market Energy cost accounts for almost 70% of total cost. BOCI Research This document may not be distributed in or into the PRC. Capacity by Region 2010 2011E Exports 6% W China 5% E China 38% W China 12% Exports 9% E China 31% S China 21% Central China 30% S China 20% Central China 28% Source: Company data. SWOT Analysis Strengths The second largest cement producer in China after CNBM.30 Target Price: HK$40. higher than the industry average of 65% Threats Any slowdown in government spending or any tightening policies could aversely affect cement demand Big threat from high coal prices and power costs Loss of market share to other aggressive cement producers Figure 3.Anhui Conch BUY Michelle Leung Price: HK$31. 31 .70 25 May 2011 SWOT ANALYSIS Figure 2.

RMB16 higher than in 1Q11. BOCI Research Rural areas 27% Figure 5. BOCI Research Promising Earnings CAGR of 46% According to company guidance. respectively.7m tonnes and 51. southern China and the eastern China rose by 21%.Anhui Conch BUY Michelle Leung Price: HK$31.2m tonnes. 7% and 6%. respectively. By April. the company should continue to gain market share by adding 20-30m tonnes of capacity each year. Although the low season in 1Q11 resulted in an 11% QoQ decline in ASP. We think this is achievable given the company’s strong track record in capacity expansion (around 20% CAGR) during 2005-10. 32 . Gross profit per tonne also increased to RMB140.5% YoY (+31. Conch’s Market Share in China is Expanding 9% 8% 7% 6% 5% 4% 3% 2% 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Source: Company data.70 25 May 2011 Figure 4. Sales Exposure by Segment 2009 2010 Infrastructure 45% Property 22% Infrastructure 40% Property 33% Rural areas 33% Source: Company data. During 2011-13. implying sales volume of 170m tonnes and growth of 24% YoY. representing 28% YoY growth. we expect it to pick up by 13% QoQ to RMB316/tonne in 2Q11. We assume the its cement capacity utilisation will remain at around 80% in 2011. This document may not be distributed in or into the PRC. We expect full-year ASP of RMB317/tonne. while that in central China. ASP had already hit RMB310/tonne. Conch’s 2011 clinker and cement capacity should grow by 24. 28.45m tonnes). In terms of geographical exposure. sales in the western China region grew at the fastest rate in 2010 (up 293% YoY to 7.7m tonnes. the historical peak.9% YoY (+26.8m tonnes) and 17. to 41.30 Target Price: HK$40.9m tonnes) to 162m tonnes and 177m tonnes. RMB30 higher than in 1Q11. Conch’s ASP rose sharply in 4Q10 (up 32% QoQ and 49%YoY) to RMB314/tonne.

000 800 600 400 200 0 Zhejiang Jiangsu Hunan Anhui Guangzhou Sichuan Xinjiang Coal price by province Source: Sxcoal. Figure 7.1% CAGR in 2007-10. As such.70 25 May 2011 Figure 6. a 4.6% increase over last year. In addition to the bulk purchase discount on raw materials and coal.6% CAGR during 2005-10.7% CAGR in the period. BOCI Research estimates 40% 35% 30% 25% 20% 15% 10% 5% 0% Clinker capacity (LHS) Clinker YoY (RHS) Consistently Low-cost Cement Producer Anhui Conch has long been the lowest unit-cost cement producer among its peers with costs only increasing at a 2. The efficient cost control stems from the steep reduction in coal consumption for cement production. the increase in residual heat installed capacity has effectively lowered the overall production cost as well. BOCI Research National average coal price This document may not be distributed in or into the PRC. National Average Rmb/tonne 1. its total unit cost only rose by 4. Conch’s Capacity Expansion and YoY Growth m tonnes 240 220 200 180 160 140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011E 2012E 2013E Cement capacity (LHS) Cement YoY (RHS) Source: Company data. 33 .30 Target Price: HK$40. we believe the consumption per tonne should continue to decline. accounting for approximately 47% of total costs in 2010 (power: 20%). which fell from over 130kg/tonne in 2007 to only around 108kg/tonne last year. Looking forward. despite the coal price increase of 9.com. Comparisons of Conch’s Sales Market Coal Prices vs.200 1. Coal has always been the largest component.Anhui Conch BUY Michelle Leung Price: HK$31. This company will continue to increase its residual heat installed capacity by adding approximately 166MW in 2011.

This document may not be distributed in or into the PRC. it could offset a 30% fall in commodity housing GFA starts each year. commodity housing construction remained robust as reflected by the high housing FAI growth of 34% in 1Q11. Comparison of Cement Production Cost CAGRs for 2007-10 12% 10% 8% 6% 4% 2% 0% Conch CNBM Shanshui CR Cement WCC Source: Company data. Guangxi.7% YoY growth in housing FAI growth during the quarter. Guangdong and Jiangxi (contributing roughly 78% of Conch’s total sales volume in 2010) recorded housing FAI growth of 20-50% YoY in 1Q11. While investors worry whether its large property exposure will mean higher risk should the market slump. 34 . BOCI Research estimates Favorable Exposure in Anhui Province Conch has considerable exposure in the property sector (33% of total sales in 2010 compared with only 22% in 2009). we believe that if the social housing achievement rate exceeds 70% this year and 50% next year. Anhui alone reported 49. As calculated in Figure 21 of our sector report. Within this. our view is that social housing construction is likely to offset the slowdown in commodity housing projects.30 Target Price: HK$40. BOCI Research estimates Figure 9. Conch has consistently been one of the Lowest-cost Cement Producers in our Coverage Universe Rmb/tonne 300 250 200 150 100 50 0 2007 Conch 2008 CNBM 2009 2010 Shanshui 2011E 2012E 2013E WCC CR Cement Source: Company data. Anhui.70 25 May 2011 Figure 8. which we believe is a result of benefiting from the robust demands from social housing.Anhui Conch BUY Michelle Leung Price: HK$31. Meanwhile.

31) (0.Anhui Conch BUY Michelle Leung Price: HK$31.32 0.93 6.54 10.0 115.4 112.52 0.2 35.69 0.07 0.20) (0. Anhui (which accounts for more than 55% of Conch’s total capacity) reported exceptionally high growth of 53% YoY in new starts during 1Q11.23 (0.45 0.23 0. Growth of New Project Starts in Conch’s Major Markets 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0% -10 % -20 % -30 % 2M09 4M09 6M09 8M09 3M10 5M10 7M10 9M10 10M09 12M09 Anhui Source: Digital Cement. unlike many provinces in China that have reported a significant slowdown in new project starts.3 62.34 2.66 7.34 0.63 0.21 0.6 87.1% posted in 2010.75 0.1 46.27 0.40 0.31) 4 3 2 2 1 1 0 0 (1) (1) (1) 74.70 25 May 2011 Figure 10.24 0.31 3.85 4.29 0. Cement Demand Derived from Social Housing in Conch’s Major Markets (A) Potential cement (B) Potential Incremental cement demands Cement demand demand growth in 2011 Actual cement driven by social housing Incremental in driven by social housing demand in 2010 % of total (mt) 2011 (mt) (= B/C) (%) (C) 3 4 3 4 3 4 4 2 7 5 2 4.1 2010 (m units) Anhui Conch Guangxi Hunan Guangdong Zhejiang Jiangsu Anhui Sichuan Jiangxi Heilongjiang Chongqing Gansu 0.35 0.38 0.7 132.71 0.74 2.0 24.16 5.70 2.85 1.36 0.27 0.15 YoY growth (%) 297 66 148 43 50 14 4 (5) (2) (4) (12) Source: Provincial governments. BOCI Research Furthermore.47 6. which was even stronger than the 14. Figure 11.51 3.13 0.77 5.50 0.17 2011 target (m units) 0.88 4.20) (0.31 0.5 78. 2M11 35 .30 Target Price: HK$40.8 156.76 1. BOCI Research Guangdong Guangxi 11M10 Jiangxi This document may not be distributed in or into the PRC.

BOCI Research Guangdong Guangxi Figure 13.Anhui Conch BUY Michelle Leung Price: HK$31.30 Target Price: HK$40. Growth of New Project Starts in Conch’s Major Markets 140 % 120 % 100 % 80 % 60 % 40 % 20 % 0% -20 % -40 % 2M10 3M10 4M10 5M10 6M10 7M10 8M10 9M10 2M11 12M09 10M10 11M10 12M10 3M11 2M11 Jiangxi -60 % Anhui Source: Digital Cement. BOCI Research Guangdong Guangxi This document may not be distributed in or into the PRC. 36 . FAI Growth in Conch’s Major Markets 60 % 50 % 40 % 30 % 20 % 10 % 2M09 4M09 6M09 8M09 3M10 5M10 7M10 10M09 12M09 9M10 11M10 0% Anhui Source: Digital Cement.70 25 May 2011 Figure 12.

usually accounting for a mere 17-20% of full-year revenue. 37 . Having said that. Breakdown of Conch’s Production Cost in 2010 Manufacturing cost 2% Labour 2% Depreciation 15% Coal 47% Raw materials 14% Power 20% Source: Company data. the first quarter is always the slow season for the cement sector. BOCI Research This document may not be distributed in or into the PRC. Figure 14.70 25 May 2011 FINANCIALS Revenue There is a distinct seasonal pattern in Conch’s sales volume (as shown in the figure below) leading to a clear uptrend throughout the year. consistently making up more than 40% of total cost per tonne.Anhui Conch BUY Michelle Leung Price: HK$31. BOCI Research 2Q 2009 3Q 4Q 2010 Cost Breakdown Coal has always been Conch’s largest cost component. we believe coal consumption could be lowered to 92kg if the government’s target is followed. coal consumption per tonne has been lowered from 130kg/tonne in 2007 to only around 108kg/tonne. Figure 15. Conch’s Sales Volume by Quarter (m tonnes) 40 35 30 25 20 15 10 5 0 1Q 2008 Source: Company data. Thanks to the higher efficiency. Conch’s 1Q11 revenue accounted for 17% of our full-year estimate.30 Target Price: HK$40. and by end-2015.

BOCI Research 317 248 209 131 60 80 137 339 359 70 60 50 40 146 30 20 10 0 2010 2011E ASP 2012E 2013E GP/t YoY Figure 18.000) (8.Anhui Conch BUY Michelle Leung Price: HK$31. Conch’s Production Cost per Tonne RMB/tonne 250 200 150 100 50 0 1Q 2008 Source: Company data. BOCI Research Free cash flow to equity This document may not be distributed in or into the PRC.000 10.000 6.70 25 May 2011 Figure 16. BOCI Research 2Q 2009 3Q 2010 4Q 2011 Figure 17.000 2. Conch’s Gross Profit per Tonne and ASP Comparison RMB/tonne 400 350 300 250 200 150 100 50 0 2009 GP/tonne Source: Company data.000 8. 38 .000) (6.000) (4. Conch’s Free Cash Flow Turning Positive RMB m 12.30 Target Price: HK$40.000 0 (2.000 4.000) 2008 2009 2010 2011E 2012E 2013E Free cash flow to firm Source: Company data.

5bn bond issuance. Net gearing dropped from 28. very low compared with peers. with total loans up slightly by 2% in 1Q11 to RMB13. we estimate yearly capex of around RMB12-13bn.25 0.10 2008 2009 2010 2011E 2012E Source: Company data. which should be totally covered by its operating cash inflow amounting to RMB17bn-23bn over the next three years. This document may not be distributed in or into the PRC.20 0.70 25 May 2011 Figure 19. Conch’s Improvement in ROE due to Higher Profitability (% ) 0. BOCI Research Low Gearing As of March 2011.35 0.30 Target Price: HK$40. Conch had RMB3.8% in 4Q10 to 26.30 0.27bn.4% in 1Q11.Anhui Conch BUY Michelle Leung Price: HK$31. 39 .15 0.07bn in cash. The relatively low gearing should last even after the recent approval of the RMB9. Looking forward. according to our estimates.

We reckon that the regions with higher risk of potential price caps are Xinjiang and Tibet as the P. some provinces like Fujian and Hainan imposed price caps last year.5 cement prices in both places have reached RMB600/tonne. 40 . Having said that. This document may not be distributed in or into the PRC.O. 42. We believe policies should remain favourable to large players. Since cement prices have been rising substantially since 4Q10. However. at least until all outdated capacity is eliminated and the market concentration rate rises. While the property sector accounts for more than 33% of the company’s total sales.30 Target Price: HK$40. any delay in social housing projects or significant slowdown in commodity housing demand could lead to undesirable impacts on earnings. we do not expect a nationwide rollout as we believe cement prices are still low in general. However. Price caps. Any change in the policy (effective since September 2009) that stipulates no new cement production lines to be built could easily trigger oversupply once again. Resumption of new production line approvals.Anhui Conch BUY Michelle Leung Price: HK$31.70 25 May 2011 KEY RISKS Property slump. we believe its sales exposure can be rather flexible depending on downstream demand. we do not believe the government will allow new lines to be built in the near term.

Anhui Conch BUY Michelle Leung Price: HK$31. while every 10% increase in the coal price would lead to a 9% decline in earnings. 2011 EPS Sensitivity Analysis 10% increase in coal price 10% increase in cement ASP 10% increase in sales volume Source: BOCI Research estimates EPS impact -9% +29% +10% This document may not be distributed in or into the PRC. 41 .30 Target Price: HK$40.70 25 May 2011 SENSITIVITY ANALYSIS Based on our sensitivity analysis. Every 10% increase in ASP would result in a net profit boost of approximately 29%. Figure 20. assuming no other changes. followed by coal prices and sales volume. ASP appears to be the most earnings-sensitive variable.

the company had a capacity of 150m tpa. Jiangxi and Hunan) and eastern China (Jiangsu.7% in China. Western China (Sichuan. Anhui Conch Group. Figure 21. a state-owned enterprise. has a 35. Conch’s markets fall in a “T” shape. Chongqing and Gansu). Conch was listed on the Hong Kong Stock Exchange in September 1997 and the Shanghai Stock Exchange in February 2002 (600585 CH). BOCI Research Average Avg + 1 SD Avg -1 SD This document may not be distributed in or into the PRC. is the second largest cement producer in China after CNBM in terms of production capacity.7% stake in the company. with Anhui at the intersection.70 25 May 2011 COMPANY BACKGROUND Anhui Conch.Anhui Conch BUY Michelle Leung Price: HK$31. Zhejiang. Its parent company. Conch still Trading at Low End of P/E Range 60 50 40 30 20 10 01/00 07/00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11 0 (x) P/E Source: Bloomberg. Fujian and Shanghai) form the top while southern China (Guangdong and Guangxi) form the bottom. Company Shareholding Structure State-owned Assets Supervision and Administration Commission of Anhui Province 100% Anhui Province Investment Group Limited 51% Anhui Conch Holdings Company Limited 35. central China (Anhui. The company’s business scope covers the manufacture and sales of cement and clinker under the brand name Conch. BOCI Research Figure 22.7% Anhui Conch Cement Company Limited Source: Company data. 42 . As of 2010.30 Target Price: HK$40. equivalent to a market share of approximately 7. While maintaining its leading position in its existing markets. the company has been consolidating its presence in new markets through mergers and acquisitions.

990 15.071 54.770) (182) 6.47 8.9% 12-13E 17.8 0.30 Target Price: HK$40.394 411 28.966) 8.938 476 78.2% 21.029 43 25.566) (2.002 3.701) (5.172 5.0% 107.841) 10.800 21.9 11.8% 12-11E 60.274 3.500 39.915 6.35 16.066 (1.0% 62.5% 112.70 25 May 2011 Income Statement (RMB m) Total turnover Cost of sales Total operating costs Operating EBITDA Deprec.4 12-09 24.915 4.7% 17.72 14.183 3.4 (2.4 (1.765 60.252 4.503 (2.275 4.071 46.596 (451) 331 (1) 34 4.706 6.508 (23.025 124.867 13.531 (4.508 (882) (121) 3.248 (32.893 (5.904 13.651 36.918 12-12E 11.059 104.004 4.990 12-13E 85.128 44.625 12-13E 17.486 620 60.992 2.758 10.115 (1.677 Source: Company data.5% 17.478 214 2.778 24.Anhui Conch BUY Michelle Leung Price: HK$31.163 6.942 15.804 12-12E 72.7% 37.210) (7.404 2.706 10.101 (514) 502 27 8.082 227 2.207 32.938 476 63.030 2.706 12.778 798 2.605) 4.971) (2.767 (51.566 63.431) 6.997 (44.294 (606) 1.9 (0.343 28.388 2.3% 17.8 14.172 1.470 104.825 493 1.004 12-10 2.563 33.9% 116.625 13.1% 24.163 12-11E 55.4 8.2) 12-11E 2.5 6.219) 24.61 0.729 998 78.392) (555) 18.249 (521) 773 30 17.0 15.828 10.358 4.526 2.071 71.677 15.627 3.680 (2. Bloomberg data.37 0.679 10.432) (472) 15.3% 76.119 4.98 0.196 4.938 476 44.074 5.182 72.737 78.998 (17.183 13.4) 12-10 1.7% 12-09 3.0% 75.594 10.546 5.7% 12-12E 32. 43 .16 0.264 12-11E 7.1% 95.287 536 47.971 476 34.814 Underpinned by 20% sales volume CAGR and 13% ASP CAGR Balance Sheet (RMB m) Total cash and equivalents Accounts receivable Inventories Other current assets Total current assets Net fixed assets Total investments Intangible assets Other assets Total long-term assets Total assets Trade creditor Short-term debt Other current liabilities Total current liabilities Total long-term debt Other liabilities Shareholders' equity Minority interests Total liabilities & equity Growth Revenue growth Operating EBITDA growth Operating EBIT growth Pretax profit growth Net profit growth 12-09 3.1% 23.616 12.5% 25.568 (587) 876 36 21.201 (1.06 0.732 5.0% 24.23 6.479 12-10 34.9% 24.252 3.3% 17.5% 12-10 38.431) 17.495 47.804 12.8) 12-13E 3.991) (8.226 220 2.298) 19.493 1.543 5.546 4.482) 28.6) 12-12E 3.506 3.495 124. and amort.509 31.3% 80.918 10.935) 21.814 18.736 6.435) 25.350) (378) 12.264 4.61 11.9% 34.160 10.729 (3. BOCI Research estimates This document may not be distributed in or into the PRC.077 10. Operating EBIT Net interest income Exchange gains Other recurring income Associates' profit Exceptional income Pre-tax profit Taxation Minority interests Preferred dividends Net profit Recurring net profit Per Share Values (RMB) Earnings per share Dividend/share Book value per share Tangible BVPS Net cash/(debt) per share 12-09 1.7 (3.181 48.071 80.761 (6.127 1.

178) (784) (784) 12-10 8.0 15.7 62.825) 6.5% 12-11E 36.2 7.000) 370 (0) (12.000) 307 0 (12.431 521 1.9% 1.4 67.335 5.8% 18.7 13.331) (4.8 17.0% 31.507) (1.341) (1.9 10.8 6.435 606 120 (6.7% 29.7 19% 0.30 Target Price: HK$40.8 22.5% 18.462 10.630) (3.813) (618) (1.0% 30.462 Key Ratios 12-09 Profitability EBITDA margin EBIT margin Pre-tax margin Net profit margin Liquidity Current ratio Interest coverage ratio Net debt to equity Quick ratio Valuation P/E (x) Core P/E (x) P/B (x) P/CF (x) EV/EBITDA (x) Activity ratios Inventory days Accounts receivables days Accounts payables days Returns Dividend payout ratio ROE ROAA ROACE 24.703 (882) (358) 7.0 20.194 2.605 451 1.5 4.935 587 1.Anhui Conch BUY Michelle Leung Price: HK$31.6% 13.092 (13.8 44.0% 16.0% 19.7% 30.0 5.5 7% 1.335 12-12E 22.960) 4.7 Net cash 1.3 20.4% 18.3% 1.270) 141 17.6 6.776) (2.000) 160 27 (7.6% 11.395) (3.693) (3.9 114.6 8.2% 12-13E 34.70 25 May 2011 Cash-flow Statement (RMB m) Pre-tax profit Depreciation Goodwill & other amort.1 15.6 67.010 (9.0% 27.8 44.7 114.1 8.2 7.7 44.000) 248 0 (11.7% 31.2 13.1% 17.185 3.6% 1.966 514 (1.1 7.752) (2.3% 7.983 12-13E 26. Net interest Change in working capital Tax paid Other operating cash flow Operating cash flow Capex Cash flow from disposals Acquisition of subsidiaries Others Cash flow from investing Shares repurchased Debt issued Proceeds from issue of shares Interest received Dividends paid Interest paid Other cash flow from funding Cash flow from financing Total cash generated Free cash flow to firm Free cash flow to equity 12-09 4.676 (13.0 8.5% 23.0 3.825) (3.5 22.2 20.0 11.601 (913) 4.5 44.087 (12.0 20.7% 30.790) 19.023 6.115 1.508 1.7% 30.7% 31.2 21% 0.8% 18.4 42.2 86.6 2.293 (5.0% 22.983 6.680 3.8 32% 0.1 32.233) 4.3 1.423 5.2% 23.637 10.300) 202 (1.9 11.5 67.1% 30.0% 14.867) (1.447 (884) (4.7 115.083 (4.5% 17.9% 22. 44 .3% Expect margin to stay high over the next few years Source: Company data.1 44.9% 23.9% 12-12E 34.244) (10. Bloomberg data.029 (8.0% 0.9 67.2 37.6 8.0 4.497) (714) 23.242) 282 (2.211 2. BOCI Research estimates This document may not be distributed in or into the PRC.514) 1.331) 12-11E 17.1 38.7% 31.7% 1.770) (920) 6.4% 12-10 29.2 1.8% 12.0 23.2 7.2% 31.

18 10. Closing prices are as of 24 May 2011.109 0. We initiate coverage with a BUY call on the stock.4% 6. sales volume and interest rate Trading Summary H . we believe attractive valuation has emerged.97 4.1% 3.227 1. P.8% 12-13E 111.82 (4.46%) 1.74 7. China CNBM targets to expand aggressively in northern China.4 52.20 8. Source: Bloomberg.3% 3.09 7.9 1.068 0.3 3M 12M 58 141. High gearing of 182% and thus earnings erosion could be significant under a rising interest rate environment.7 1M -5.58 TP Basis: Sum of parts Sector Rating: OVERWEIGHT Where are we Different? Our EPS estimates are 3. (HK$ m) Daily turnover (3M avg.89% 33.43% 27.56 7. We value each cement business unit by the target EV/tonne and other non-cement segments by target P/E multiples as shown in Figure 1.349 1.6 63. While we see more potential in the lightweight building material and engineering service segments.04 13.02 29.China National Building Material (3323 HK) 19 17 15 13 11 9 7 120 5 100 80 60 40 20 May10 May11 Sep10 Nov10 Mar11 Jul10 Jan11 Vol th Price Close Relative to HSCEI (RHS) 280 251 223 194 166 137 109 80 China National Building Material Repeating its eastern China consolidation in the north China National Building Material’s (CNBM) sales momentum remains strong with elevated profitability throughout 4M11.30 3323 HK Price: HK$ 14.78 15.6 5.297 26.8 128.988 56.leung@bocigroup.810 55. Valuation The stock is trading at an attractive valuation. based on a sum-of-parts methodology. We think the company can repeat its successful eastern China consolidation in the north. Mixed Growth in Non-cement Segment The non-cement segment contributed 27% of the company’s revenue in 2010.02 14.2%) NA 12-11E 80.Initiating Coverage 25 May 2011 BUY 19% side Target Price: HK$17.69% 19.49 2.0% 78. BOCI Research estimates.com 1.com and www. However. BOCI research is available electronically on Bloomberg (BOCR <go>). thomsonreuters.718 35.11 11. 5 Fig 12 Fig 10 Long-term BUY on Consolidation in N.12% 24.7% 1.51 0.30 0.86% 26.02% 2.52 8. 48.5% below and 2% higher in 2011/12 Key Highlights of this Report CNBM’s latest operational data in April 2011 CNBM’s latest market share in each province Earnings sensitivity to coal.779 23.085 0.663 1.39 51. cement prices.4% 9.6% NA 1.30. .3   Key Risks to Rating Lower earnings visibility than other pure cement plays.70 7.22 (3.29%) 3.76 0.2% Source: Company data.5% 8. We believe CNBM can repeat its eastern China success story in northern China going forward. we remain cautious on CNBM’s aggressive expansion of rotor blade production amid the oversupply.11 6. we see it taking at least 1-2 years.69 (50.) Net debt / Equity (%) Major shareholder (%) CNBM Group YTD 63.175 1.405 1.72 7.229 1. We expect North Cement’s capacity to expand at a 32% CAGR in 2010-13 to 30m tonnes. Going forward. Bloomberg data.3% NA 1.260 2.0% NA 1. We set our target price at HK$17.84 0.bociresearch.89 0.96 5.199 11.com. BOCI Research estimates BOCI Research Limited China: Industrials Michelle Leung (852) 3988 6431 michelle. After more than a 15% share price correction over the past month.6% CNBM’s Key End Consumers by Segment China United South Cement Infrastructure 40% 20% Urban development 45% 70% Real estate 15% 10% Source: Company data. much faster than South Cement’s 16% CAGR and China United’s zero growth.80 132.1% NA 12-10 51. We initiate coverage on CNBM with a BUY call. Absolute (%) Relative to HSCEI (%) Shares outstanding Free float (%) Market cap.399 59.8 Investment Summary Total turnover (RMB m) Revenue growth Net profit (RMB m) Fully diluted EPS (RMB) FD P/E (x) FDEPS growth Previous EPS (RMB) Consensus EPS (RMB) EPS vs Consensus Recurrent CPS (RMB) P/CF (x) EV/EBITDA (x) Dividend/share (RMB) Dividend yield ROE 12-09 33.5% 12-12E 99.09 3.82 28. the company’s growth in the cement business should be sustained by its aggressive expansion targets.

we think CNBM is more a long-term buy. whose share price came down by 15% within a month.5 1.1 11.073 9.4 6x 7x 8x 6. BOCI Research estimates This document may not be distributed in or into the PRC. we have a strong conviction toward CNBM’s planned consolidation in northern China. and (ii) high gearing and thus significant earnings erosion under a rising interest rate environment.009 Target price Source: Company data. CNBM’s Sum-of-parts (SOP) Valuation Cement Bear case with 20% discount from base case China United South Cement North Cement Base case China United South Cement North Cement Bull case with 20% premium from base case China United South Cement North Cement LWBM BNBM 2012E 1.458 8. compared to its mid-cycle valuation of 12x. Figure 1. based on a sum-of-parts valuation methodology. As per our discussion with management.6 17. We think its valuation has become attractive again.488 10.951 80 110 60 83.3 0. CNBM is not our top pick of the sector as we see the weaknesses of (i) lower earnings visibility than other pure cement plays.215 1. Given its huge success in consolidating eastern China. We initiate coverage on CNBM with a BUY call. the company’s sales momentum and profitability remain strong.7 1.687 0.3 23.213 EV/EBITDA multiple (x) Bear case Base case Bull case US$/tonne 64 88 48 60. Looking ahead.4 1.390 HK$/share 8. The company is trading at only 10x 2011 P/E. its cement business growth should be sustained by its ambitious expansion targets (raising the market share from 30-50% to 50-70%).30 25 May 2011 VALUATION AND RECOMMENDATION Worries over an economic slowdown have triggered some profit-taking on CNBM. Despite its attractive valuation.2 Glass fibre and FRP products 2012E 253 Bear case Base case Bull case Bear case Base case Bull case Bear case Base case Bull case 5x 6x 12x 6x 8x 10x 1. We value the cement business of each business unit by the target EV/tonne and other non-cement segments by target P/E multiples as shown in Figure 1.CNBM BUY Michelle Leung Price: HK$14.3 Engineering services 2012E 1. as we remain especially cautious on the rotor blade business.8 2. We set our target price at HK$17.3 0. 46 .790 8.30.185 1.9 2.58 Target Price: HK$17. Given that a period of 1-2 years is required for consolidation.512 96 132 72 18.038 6.3 13.519 3.4 Segmental value (RMB m) 38.

30 25 May 2011 SWOT ANALYSIS Figure 2.58 Target Price: HK$17. Zhejiang. SWOT Analysis Strengths Has taken the crown from Anhui Conch to become the largest cement producer in China with massive exposure in SE China and dominating position in Jiangsu.CNBM BUY Michelle Leung Price: HK$14. BOCI Research Weaknesses High gearing of 182% as of 2010 Tight finances to support large-scale acquisitions Facing oversupply in the rotor blade industry Threats Any slowdown in government spending or any tightening policy could adversely affect cement demand Lack of acquisition targets could result in delays of expansion Earnings erosion under a rising interest rate environment This document may not be distributed in or into the PRC. 47 . etc Successful consolidator with proven track record via M&A Diversification in income stream from non-cement businesses Opportunities Growth potential in engineering business Cement price growth potential in SE China Consolidation in northern China could help to improve the overall pricing power in that region in the long term Source: Company data.

With a 13m tonne capacity under the business unit “North Cement” by end-2010. the company aims to raise its market share of every existing market to 50-70%. BOCI Research estimates Market share 55% 62% 28% 30% 34% 11% 25% 13% Minimal Minimal This document may not be distributed in or into the PRC. cement profitability per tonne is likely to improve. cement prices in northern China have started to recover in April after the 1Q low season. China’s cement demand should be boosted under Central Document No. and Jilin Yatai Group has secured its leading position in Jilin via mergers and acquisitions. Liaoning and Heilongjiang.58 Target Price: HK$17.CNBM BUY Michelle Leung Price: HK$14.2bn throughout the 11th 5-year Plan (5YP) period. Indeed. North Cement’s cement ASP rose by 3. Having said that. We see upside on cement prices in northern China upon consolidation by 2013-14 as large players like CNBM and Shanshui Cement have emerged. its long-term goal is to reach 50m tonnes with major expansion in Jilin. CNBM is planning to repeat the same story in northern China. After making little effort in the eastern China consolidation over the past few years. much faster than South Cement’s 16% CAGR and China United’s zero growth. 48 . CNBM’s Market Share by Province Province E China Zhejiang N. its existing market share within that region is as high as 30-60%. that in Jilin is more meaningful at 25%. Shanshui has already become one of the top 3 players in Liaoning. Gross profit per tonne rose from 1Q11’s RMB23 to RMB50 in April. Figure 3. Jiangsu Shandong Central China Hunan Jiangxi S China Henan N China Jilin Inner Mongolia Heilongjiang Liaoning Source: Company data. more than 10 times higher than the average annual investment of RMB1.5% MoM to RMB270/tonne in April. representing a 63% YoY increase. Within this.1.30 25 May 2011 REPEATING EASTERN CHINA SUCCESS IN THE NORTH? WAIT AND SEE After the successful consolidation in eastern China. While CNBM’s market share in Liaoning and Heilongjiang is still minimal. the Heilongjiang government will spend at least RMB15bn on 352 water projects in 2011. Going forward. With higher industry concentration in northern China. We expect North Cement’s capacity to grow at a 32% CAGR within 2010-13E to 30m tonnes. which says the government will spend RMB4trn on the construction of water resources facilities over the next decade.

Even North Cement. and North Cement’s fall by 3% YoY to RMB272. respectively. We estimate CNBM’s capacity to grow at a 12% CAGR within 2010-13E to 286m tonnes. 22% of our full-year forecast for the cement business only.97m tonnes. our calculated revenue in 4M11 was RMB14. Good April Operational Data CNBM’s cement ASP and GP/tonne climbed in April to a record high.30 25 May 2011 Earnings to Grow at 36% CAGR within 2011-13E Thanks to significant improvement in eastern China’s cement demand and supply dynamics.CNBM BUY Michelle Leung Price: HK$14. according to our estimates. Figure 4. This document may not be distributed in or into the PRC. 49 . During 2010-13E. Within this. we project the gross profit per tonne for China United to rise 66% YoY to RMB90 and that for South Cement to expand 1% YoY to RMB118. All in all.1bn. No significant capacity expansion would be contributed by China United. compared to the company’s 12th 5YP target of 300m tonnes. the major capacity growth should be achieved by South Cement and North Cement with CAGRs of 16% and 32%. saw its ASP improving continuously from January’s RMB218/tonne to RMB278/tonne. CNBM’s Capacity Growth (2009-13E) (m tonnes) 300 250 200 150 100 50 0 2009 China United 2010 2011E 2012E 2013E South Cement (80% ) North Cement (45% ) 8 117 100 52 70 74 74 74 13 142 162 182 30 20 30 Source: Company data. CNBM’s total sales volume in April rose 21% YoY to 16. while 4M11 sales volume was up 8. the gross profit per tonne for North Cement is expected to decline by 14% YoY to RMB47/tonne before a gradual recovery in 2012-13E. which was in line and accounted for 22% of our full-year target. South Cement’s grow by 38% YoY to RMB347. BOCI Research estimates All in all.58 Target Price: HK$17. the worst performing business unit in CNBM. with the gross profit per tonne jumping from RMB23 to RMB50. making it a year of record earnings growth. However.2%YoY to 44. we also assume the average unit production cost to increase by 15% per year in 2011-13E under company guidance.98m tonnes. we expect CNBM’s overall cement ASP to grow 34% YoY in 2011 to RMB334/tonne. China United’s cement ASP should grow by 30% YoY to RMB311. On the other hand.

BOCI Research estimates 8% 6% 4% 2% 0% -2% -4% -6% -8% Feb Mar Apr YoY growth (RHS) This document may not be distributed in or into the PRC.30 25 May 2011 Figure 5. Monthly ASP Trend by Business Unit China United Rmb/tonne 301 300 299 298 297 296 295 294 Jan 2011 (LHS) South Cement 70% 60% 50% 40% 30% 20% 10% 0% Feb Mar Apr YoY growth (RHS) Rmb/tonne 360 350 340 330 320 310 300 290 280 Jan 2011 (LHS) North Cement 70% 60% 50% 40% 30% 20% 10% 0% Feb Mar Apr YoY growth (RHS) Rmb/tonne 300 250 200 150 100 50 0 Jan 2011 (LHS) Source: Company data. 50 .58 Target Price: HK$17.CNBM BUY Michelle Leung Price: HK$14.

The company indicated that every RMB100/tonne increase in coal price translates into a RMB11/tonne increase in cement production cost. following the power rationing implemented since 20 May.58 Target Price: HK$17. coal makes up more than 30% of total COGS while power accounts for another 30%. CNBM’s Total Sales Volume Trend (2009-13E) (m tonnes) 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011E 2012E 2013E 100 50 0 (% ) 250 200 150 Sales volume of cement and clinker (LHS) Source: Company data. respectively. Indeed.5/ RMB11/ RMB5. which translate into only RMB1-3. we expect coal price to rise by RMB68/tonne (vs. 51 . For the full year of 2011. representing increases of RMB5/tonne. RMB780/tonne and RMB573/tonne.CNBM BUY Michelle Leung Price: HK$14. These are only minimal compared to its stunning ASP hike (+RMB86/tonne on average). we expect the company to increase its ASP in Jiangsu (c. the average coal prices paid by China United.3/tonne increases in cement production cost. RMB100/tonne (same as company estimate of RMB100/tonne) for North Cement and RMB53/tonne for South Cement.8 increases in production cost per tonne. According to the company. which will translate into RMB7. 12% of its total capacity) soon. company estimate of RMB50/tonne) for China United. South Cement and North Cement in 1Q11 were RMB695/tonne.30 25 May 2011 Figure 6. BOCI Research estimates YoY growth (RHS) Pricing Power Offsets Rising Costs On the cost front. RMB30/tonne and RMB23/tonne YoY. This document may not be distributed in or into the PRC.

BOCI Research estimates Gross margin (RHS) Glass Fibre Business in Blue Glass fibre business includes fibre glass. Thus. 1Q accounts for 19% of our full-year estimate. due to the competition in the industry. All in all. However. Another RMB15. Revenue and Gross Margin Trend of Engineering Services Segment Rmb m 9. we project a 28% CAGR in revenue from the engineering services segment during 2010-13E.3bn.000 5. the company has a RMB7. Given the heavy oversupply in the global market over the past few years.750m sqm). we expect the margin to remain low. wind blades and some electronic equipment manufacturing.000 0 2006 2007 2008 2009 2010 2011E 2012E 2013E 30% 25% 20% 15% 10% 5% 0% Revenue (LHS) Source: Company data. which accounts for 27% of revenue in 2010. we anticipate the revenue contribution of the glass fibre business will drop from 6% in 2010 to 2% in 2011. Among the non-cement segments. reinforced plastic and rotor blades Glass fibres are used in making oil & gas pipelines.5% CAGR within 2010-13E to 1.000. we assume the sales volume to drop 57% YoY in 2011 to 2. Rapid Growth in Engineering Services Segment On the other hand.13E.30 25 May 2011 MIXED GROWTH SEGMENTS IN NON-CEMENT While we believe CNBM’s cement segment will deliver stable growth over the next few years (+34% CAGR within 2010-13E). we remain conservative on the glass fibre business and expect a significant fall in earnings contribution this year. this enhances the value of the newly-signed contracts tremendously. we see more potential in the lightweight building materials segment given the company’s aggressive expansion plan (+20.58 Target Price: HK$17. we project a steady gross margin at 20% for 2011. which has transformed the business from conventional glass and concrete construction materials to solar power and photoelectric display industry. While 1Q11 sales volume was up 51% YoY to 153m sqm and revenue rose 39% YoY. As a result. While we remain cautious on CNBM’s ambitious expansion of rotor blade production (company guidance: +30% CAGR within 2010-13) due to serious oversupply and 1Q11 sales (-58% YoY to 399 units). we expect the segment’s full-year revenue to increase 21% YoY to RMB5.850 units. representing a 1.2bn backlog.000 4.000 2. This document may not be distributed in or into the PRC.000 7.CNBM BUY Michelle Leung Price: HK$14.000 3.4x backlog/revenue ratio. the average ASP was RMB430. we believe ASP should command a higher growth rate (+18% YoY to RMB420. 52 .000 8.750/unit) considering the improvement in product mix.000 1. we have mixed views on the company’s non-cement business. Having said that.3bn of contracts are under negotiation. roofing systems. given the accelerating research and development efforts in high-end technology. 63% of which are international projects. During 1Q11. Figure 7.000 6. As of 2010.

2 (14.428bn.3bn in 2012 and RMB16bn in 2013. The company has more than RMB23bn banking facilities for now.2 9.7 2010 54.7 56.5 56. As such.6 5. we still expect net gearing to improve to below 80% by 2013E. followed by RMB9.1 36.3 5. We expect the net gearing to decline to 130% by end-2011 due to the enlarged equity base.5 77.CNBM BUY Michelle Leung Price: HK$14.6 19.8 116.000 20.4 24.4 66.1 2012E 98.4 137.000 60.1 124.000 40.6 (9. Indeed. 2010-13E CAGR +29% Source: Company data.699. which was as high as 182% as of 2010.8 2011E 90. CNBM’s Revenue Trend and Forecasts 120. Moreover. 53 . we expect the share to increase to 81% in 2011.2 NA 55.4) 110.95m H shares in September 2010.4 High Gearing CNBM is famous for its heavy leverage. BOCI Research estimates Figure 9.3 2013E 103.7 NA NA 34. we expect cement revenue to grow at a 34% CAGR.6 119.9 7. the net gearing ratio would drop further.3) 29.2 124.000 80. During 2010-13E. BOCI Research estimates 2009 43.4 98. and enlarged the share capital by approximately 8. net gearing was effectively lowered from 248% in 1H10 to 184% by end-2010. We estimate the company to generate RMB6bn operating cash flow in 2011. net gearing should stay high without A-share issuance. we expect the company to spend around RMB16bn on capex this year and another RMB12bn and RMB9bn in 2012-13. Along with the ambitious expansion plan.7 94.8% to around 2.5m shares. it conducted a placement of an aggregate of 238.2 4.6 47.000 0 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Lightweight building materials Glass fibre and FRP products Cement and clinker Others Engineering services 2005-13E CAGR +48%.30 25 May 2011 FINANCIALS Revenue While the cement segment generated around 73% of total revenue in 2010.58 Target Price: HK$17. Should the A-share placement come through. reflecting our concerns on the overcapacity in rotor blade supply. This document may not be distributed in or into the PRC. respectively. Having said that.000 100. with net proceeds of HK$3. even without A-share issuance as we now assume in our model. Figure 8. CNBM’s Gross Profit per Tonne Trend and Forecasts Gross profit per tonne (RMB) China United YoY growth (%) South Cement YoY growth (%) North Cement YoY growth (%) Overall YoY growth (%) Source: Company data. while the most lacklustre glass fibre segment should decline at a 16% CAGR during the period.3 8.8 130.3 55.4 5.

30 25 May 2011 Financial Costs Account for 30% of Operating Profit While we see potential earnings erosion under a rising interest rate environment.CNBM BUY Michelle Leung Price: HK$14. However. every 25bp increase in interest rate would erode CNBM’s 2011 earnings by 1. This document may not be distributed in or into the PRC. risk could be high if earnings growth could not be realised as expected. net financial costs accounted for almost 30% of operating profit.4%. According to our sensitivity analysis. its SOE background should ease investors’ worries on bankruptcy.58 Target Price: HK$17. 54 . the earnings impact from higher financial expenses should be minimal. compared to the gains from cement price hike. Moreover. In 2010.

This document may not be distributed in or into the PRC.58 Target Price: HK$17. fixed asset investment (FAI) could shrink as a result of higher financing cost. Price Cap Risk With reference to the price caps imposed in Fujian and Hainan last year.5% to 24. However. which could hamper the demand for cement as well as rotor blades from the highly-geared wind farms. the BOCI projections are 21. While FAI growth declined from 30. Zhejiang and Jiangsu. Every 25bp increase in interest rate would erode 2011 earnings by 1. namely Shanghai. Moreover. the price cap implemented in Fujian only lasted for a few months. 55 . High gearing CNBM”s net gearing was high at 182% as of 2010. Jiangxi.30 25 May 2011 MAIN RISKS Government’s Tightening Policies Under the rising interest rate environment. we believe a nationwide price cap is unlikely.5% for 2011 and 20% for 2012. it could also happen in regions with high cement prices. Anhui.4%.5% last year.CNBM BUY Michelle Leung Price: HK$14.

2011 EPS Sensitivity Analysis For every 10% increase in coal price For every 10% increase in cement ASP For every 10% increase in sales volume For every 25bp increase in interest rate Source: BOCI Research estimates EPS impact -9. followed by sales volume and cement ASP.2% increase in earnings. Every 10% increase in coal price would result in approximately 9. while every 10% increase in sales volume and cement ASP would lead to 8.5% +8.4% This document may not be distributed in or into the PRC.30 25 May 2011 SENSITIVITY ANALYSIS Based on our earnings sensitivity analysis.3% -1.2% +8. coal price appears to be the most earnings-sensitive variable. 56 .3% and 8.58 Target Price: HK$17.CNBM BUY Michelle Leung Price: HK$14.5% net profit erosion. assuming no other changes. Figure 10.

30 25 May 2011 COMPANY BACKGROUND CNBM was listed on the Hong Kong Stock Exchange in March 2006.6 5. CNBM’s Key End Consumers by Segment Infrastructure Urban development Real estate Source: Company data.6 1. BOCI Research Capacity (m tonnes) 28 13. Figure 11. which holds around 56% of the listed company. Its parent. 57 . sponsored by Morgan Stanley.58 Target Price: HK$17.4 13 8 4 2 70 % of the unit 40% 19% 2% 19% 11% 6% 3% 100% % of total 14% 7% 1% 7% 4% 2% 1% 35% 56 22 11 24 4 117 48% 19% 9% 21% 3% 100% 28% 11% 6% 12% 2% 59% 5. is a 100% subsidiary of the State-owned Assets Supervision and Administration Commission (SASAC). We think South Cement has been a great success as over 145 cement companies were consolidated within 3 years in Southeast China.8 13 200 43% 43% 14% 100% 3% 3% 1% 7% This document may not be distributed in or into the PRC. CNBM’s Sales Exposure by Province China United Shandong Henan Hebei Jiangsu (North) Inner Mongolia Sichuan Anhui Subtotal South Cement Zhejiang Hunan Jiangsu (South) Jiangxi Shanghai Subtotal North Cement Jilin Heilongjiang Liaoning Subtotal CNBM's total Source: Company data. The company has been adopting an ambitious M&A strategy for expansion in the past few years. BOCI Research estimates China United 40% 45% 15% South Cement 20% 70% 10% Figure 12.CNBM BUY Michelle Leung Price: HK$14. CNBM Group.6 1.

58 . BOCI Research Average Avg + 1 SD Avg -1 SD This document may not be distributed in or into the PRC.58 Target Price: HK$17.CNBM BUY Michelle Leung Price: HK$14. CNBM Still Trading at Low End of P/E Range (x) 60 50 40 30 20 10 03/06 06/06 09/06 12/06 03/07 06/07 09/07 12/07 03/08 06/08 09/08 12/08 03/09 06/09 09/09 12/09 03/10 06/10 09/10 12/10 03/11 0 P/E Source: Company data.30 25 May 2011 Figure 13.

385) 20.053 76. 59 .3% 12-09 4. BOCI Research estimates This document may not be distributed in or into the PRC.068 12-11E 80.270 28.046 8.458) 6.8% 14.1% 27.362) 24.798) 60 8.053 (664) (725) 3.890 155.944 75.764 1.3 3.225 Source: Company data.3) 12-11E 1.8% (16.355) 8.084 19.6% 12-13E 11.742 1.944 99.779) (3.532 22.714) (2.1) 12-09 33.206) 264 17.320 19.483) (3.361) (1.3% 24.7) 12-13E 1.52 0.073 938 12.30 25 May 2011 Income Statement (RMB m) Total turnover Cost of sales Total operating costs Operating EBITDA Deprec.516) 9 5.349 12-12E 99.691 57.438 (2.297 64.8% 106.08 3.764 3.374) 3.CNBM BUY Michelle Leung Price: HK$14.210 (2.3 (9.405 9.4% 70.721 (4.0% 43.656 16.736 111.199 (73.516 12-13E 2.764 2.258 40.2%) 12-11E 55.0% 12-10 56.468 30.026) 8.349 6.5) 12-12E 1.155 77.9% 36.779 (66.588) 6.301 (3.541 25.009 4.421 3.172 155.581 111.3% 31.26 7.693 22. Operating EBIT Net interest income Exchange gains Other recurring income Associates' profit Exceptional income Pre-tax profit Taxation Minority interests Preferred dividends Net profit Recurring net profit Per Share Values (RMB) Earnings per share Dividend/share Book value per share Tangible BVPS Net cash/(debt) per share 12-09 1.434 49.663 3.516 32.651 (2.076 3.2 (0.229 12-13E 111.663 12-10 51.74 0.803 (1.270 34.189 3.009 15.572 34. Bloomberg data.159 16.3% 36.478 2.3 (9.202 587 38.48 0.624 71.399 12-11E 1.399 19.405 Underpinned by 19% CAGR in cement sales volume and 14% CAGR in cement ASP during 2010-13E Balance Sheet (RMB m) Total cash and equivalents Accounts receivable Inventories Other current assets Total current assets Net fixed assets Total investments Intangible assets Other assets Total long-term assets Total assets Trade creditor Short-term debt Other current liabilities Total current liabilities Total long-term debt Other liabilities Shareholders' equity Minority interests Total liabilities & equity Growth Revenue growth Operating EBITDA growth Operating EBIT growth Pretax profit growth Net profit growth 12-09 26.215 56.8 4.109 127.434 2.009 4.111 7.560 (1.162 13.58 Target Price: HK$17.1) (14.234 27.074 24.106) 21.944 94.569 24.018 (1.3% 29.837 3.055 144.151 15.579) 198 5.8 (9.930 1.225 34.834) 9.11 5.764 4.301 31.683) 14.229 8.9% 12-12E 23.23 6.5% 23.755 (3.7) 12-10 0.049 (3.258 56.148 11.068 3.571 (3.190) (15.988 (40.297 (26.810 (53.722 3.272 2.346 28.026) 17.258 35. and amort.029) (13.061 2.571 28.663 (3.4% 11.240 17.944 87.966 2.3% 100.210 2.895 16.025) 10.8% 15.184 (2.739 65.8% 14.088) 18.322) 218 11.406 12-12E 1.422) 240 15.621 77.0 2.5 0.0 (9.895 4.57 0.802 15.718) (3.8% 50.207 2.114 28.7% 25.818 51.174) (17.826 662 42.484 (3.18 0.583 67.701 127.782 3.258 49.18 5.009 12-10 9.228 13.893 144.854 36.406 26.8% 80.5% 11.187 4.287 20.815 10.438 17.154 18.589 3.291 11.

316) (2.053 1.458 1.7 211.5% 0.0% 0.882) 13.5 4.0 1.429 (502) (2.000) 385 (6.000) 307 (9.200) (11.170) (192) 12-11E 11.392) (1.672) 2.4 7.7 4.6 109.5 10.3% 11.9% 26.051 12-10 5.9 114.4 8.2% 5.3% 8.1 114.118) (8.088 3. Bloomberg data.759) 9. is very low compared to Anhui Conch’s ratio of over 30x Expecting ROE to rise to around 25% in the next few years.539) (4.6 21.8 6.2 182% 0.4 7.5 120.100) (15.2 8.793) 2. 60 .650) (13.9% 24.316) (411) 7.811 (710) (3.4% 7.5 76.6% 18.3 14.280) (6.187) (1.1 6.026 2.000) 444 (6.599 12-13E 17.0 8.7 3.5% 12-12E 21.579 (3.929) 4.7% 11.385 3.4% 19. higher than 19% in 2010 Source: Company data.516 (781) (1.5 3.893) 1.7% 15.140) (1.659) (3.1% 19.200) (8.267 47 (6.3% 14.3% 16.5% 5.559 Rising interest coverage ratio. BOCI Research estimates This document may not be distributed in or into the PRC.0 7.558 3.905 2.313 (7.9% 0.422) (978) (4.1% 19.651 2.1 172.0 5.8% 6.057 (6.6% 18.5 8.299 4.2% 3.2 171.5% 15.483) (365) 16.148) (17.3% 19.5 114.422 (1.5 16.9 4.4 10.322) 1.5 4.9% 8.991) 12-12E 15.714) (95) 9.919) (8.9 77.720) (1.7% 33.242 1.4 80% 0.977 (9.4 2.148) 13.210 (5.1 14.516) (1.206 (2.8 64.051) (3.0% 12-13E 21.5 11.4 132% 0.9% 27.756) (2.8 76.718) (137) 16.3 2.239 (174) (1.2% 11.7% 5.361) 520 5.6 7.721 3.2% 12-11E 21. which.301 3.4% 13.790 118 (9.0 1.3 208% 0.6% 15.8 5.1 7.7 14.5 180.815) 779 (920) (3.393 15.322 (5.58 Target Price: HK$17. Net interest Change in working capital Tax paid Other operating cash flow Operating cash flow Capex Cash flow from disposals Acquisition of subsidiaries Others Cash flow from investing Shares repurchased Debt issued Proceeds from issue of shares Interest received Dividends paid Interest paid Other cash flow from funding Cash flow from financing Total cash generated Free cash flow to firm Free cash flow to equity Key Ratios 12-09 Profitability EBITDA margin EBIT margin Pre-tax margin Net profit margin Liquidity Current ratio Interest coverage ratio Net debt to equity Quick ratio Valuation P/E (x) Core P/E (x) P/B (x) P/CF (x) EV/EBITDA (x) Activity ratios Inventory days Accounts receivables days Accounts payables days Returns Dividend payout ratio ROE ROAA ROACE 24. however.5 21.6% 15.2 179.6% 6.3 8.30 25 May 2011 Cash-flow Statement (RMB m) Pre-tax profit Depreciation Goodwill & other amort.206) (1.2% 12-09 5.480) (6.662 (3.2% 0.3 64.779 (1.6 4.9% 0.CNBM BUY Michelle Leung Price: HK$14.579) 1.541) (298) 4.803 2.6% 12-10 19.4 107% 0.6% 18.433) (6.683 3.0 13.128 (11.

BUY) China Resources Cement (1313. BUY) China National Building Material (3323. BUY) Shanshui Cement (691.94. NR) BBMG Corporation (2009. BUY) West China Cement (2233.83.HK/HK$7.3. BUY) China National Materials Co Ltd (1893.HK/HK$7.58.HK/HK$6.12. HOLD) Prices as of 24 May 2011 All figures subject to rounding This document may not be distributed in or into the PRC.11. BUY) Asia Cement (China) (743.China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 LISTED COMPANIES IN THIS REPORT Anhui Conch (914.56.HK/HK$14.HK/HK$3.HK/HK$10.64.HK/HK$31. 61 .HK/HK$5.

China Cement Sector Industrials – Basic Materials Michelle Leung 25 May 2011 DISCLOSURE The views expressed in this report accurately reflect the personal views of the analysts. This disclosure statement is made pursuant to paragraph 16 of the “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” and is updated as of 23 May 2011. This document may not be distributed in or into the PRC. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analysts. Certain member companies of BOCI Group has/have had investment banking relationships with BBMG Corporation within the preceding 12 months. Waiver has been obtained by BOC International Holdings Limited from the Securities and Futures Commission of Hong Kong to disclose any interest the Bank of China Group may have in this research report. whether individually or as a group (i) do not own 1% or more financial interests in any of the listed corporations reviewed. Member companies of BOCI Group confirm that they. Each analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. BOCI Research Limited and BOCI Group. or (iii) do not have any individuals employed by or associated with any member companies of BOCI Group serving as an officer of any of the listed corporations reviewed. (ii) are not involved in any market-making activities for any of the listed corporations reviewed. 62 .

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