|Summary:||Cement prices defy seasonality in DEC:
China Cement Price Index (CEMPI) at end-DEC increased to 149.9 (+11.05% MoM, +46.34% YoY), defying typical seasonality. YoY gains were biggest in Eastern China (+73.33% YoY) and the Yangtze River Delta (+79.39% YoY), while Southwestern China had the biggest sequential increase (+22.64% MoM). Prices in Northeastern China held their ground despite plants undergoing winter maintenance. In Guangdong and Guanxi, low inventories and favorable weather conditions for construction companies enabled several quote hikes in DEC. However, lofty prices in Eastern China led to increased clinker imports from Vietnam, which by our estimate will cap cement price upside.
Given the strong price momentum in 4Q17 (see Fig.2), YoY cement prices in 1Q18 should be favorable; however, low seasonality will be evident QoQ.
Thanks to rising prices, aggregate earnings for China’s cement industry in JAN-NOV 2017 increased by 102.55% YoY to RMB 78bn, despite a 0.2% YoY decrease in production volume to 2.16bn tonnes. We estimate annual earnings for 2017 will reach RMB 90bn, a YoY gain of 74% and the second highest year on record. Taiwan Cement (TCC, 1101 TT) and Asia Cement (ACC, 1102 TT) will grow their EPS by 16% and 6% respectively in 2018 as beneficiaries of the improving industry dynamics.
Buy TCC (1101 TT), TP of NT$42 (1.4x 2018F P/E), 12% upside
Buy ACC (1102 TT) , TP of NT$34 (0.9x 2018F P/E), 13% upside
We project demand will decline as the industry is heading into low season, creating cement price downside risks in late JAN. However, given the low inventory level, price consolidation should be moderate.