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text/Hu Yidao (professional investor)
Introduction: Affected by factors such as supply-side reform, environmental protection, and infrastructure filling, information on rising cement prices has been constantly flooding the screen. As cement companies hit new highs in profits, stock prices traded sideways at high prices, and the company's valuation indicators reached historical lows again, can the stock prices of cement companies with cyclical attributes break through upward, should they sell or buy?
After reading a large number of research reports, the author participated in the survey of almost all leading cement companies, and talked with insiders of the cement association, and sorted out the internal and external changes in the cement industry. Maybe after reading this article, you will have the answer!
1. Characteristics of China's cement industry
(I) Characteristics of the industrial chain
① Material ratio: 1.6-1.7 tons of raw material produces 1 ton of clinker; 1 ton of clinker can produce 1.3 tons of cement.
②Shelf life: The shelf life of clinker is relatively long, and if stored properly, it can reach 5 months. Cement is about 1 month due to high environmental requirements and warehousing costs.
③ Transportation Radius: Cement is a regional market. The transportation radius is generally 150-200km from inland trucks and 300-500km from railways; in areas where waterways are available, the transportation radius can reach 1000km or more.
④Seasonal characteristics: Cement has strong seasonality and is closely related to the weather. 2Q and 4Q are peak seasons, and 4Q is generally higher than 2Q. 1Q and 3Q are difficult to construct due to the cold or hot weather. The north usually snows from November to March of the following year, with a longer winter and a lower utilization rate than in the south.
(II) China's cement production capacity is serious overcapacity
Currently, China's cement production capacity is as high as 3.83 billion tons. In 2017, the utilization rate of cement clinker was 70% based on the designed production capacity, and the utilization rate of cement clinker was only 66% based on the actual production capacity of 2 billion tons. Capacity utilization rate is an internationally universal direct indicator for judging overcapacity. European and American countries believe that the capacity utilization rate is more reasonable at 79%-83%, and the capacity utilization rate is less than 75% to be a serious surplus. According to this indicator, my country's cement has a serious overcapacity.
In 2017, the total designed clinker production capacity in China was 1.82 billion tons, the actual production capacity was over 2 billion, and the output was 1.399 billion tons. The current capacity utilization rate is calculated based on actual capacity. The "13th Five-Year Plan for Cement Industry" plans to reduce the clinker production capacity by about 400 million tons.
(III) Cement prices show cyclical characteristics and are still in an upward cycle.
Cement prices have seen two peaks in the past ten years:
① From 2010 to 2011, power cuts were restricted and supply was restricted. The 4 trillion yuan and the 12th Five-Year Plan for 2011 led to continued strong demand, which stimulated cement prices to continue to rise and set a record high;
②2016-2017, under the stagnation of the expansion of new cement production capacity, the peak production advocated by the Cement Association has led to a vicious competition model between industries no longer and cement prices have continued to rise.
has had two troughs:
①In 2012, mainly due to the centralized supply of new production capacity in 2009-2011, it has increased significantly;
②In 2015, due to the macro economy, the growth rate of fixed asset investment in continued to decline, and cement production regressed for the first time, and at this time the peak production at the supply side was not fully implemented.
above information shows that China's cement industry has a ten-year cycle. From the cement price trend chart with data in the past, it can be found that the low points of the two cement prices were March 2006 and February 2016, with a ten year interval between them; in March 2011, the cement price hit a record high, and the difference was exactly five years.
is a cycle of ten years. The rising stage of this cycle is from 2016 to 2020, and the current upward cycle has just passed halfway.
①From the demand side, cement demand from 2018 to 2020 is in the platform period. The downward pressure on economic growth continues, the growth rate of fixed asset investment is stable, without a significant decline, and cement demand continues to maintain a platform period of 2.3 billion tons. On the supply side, the capacity reduction is still in progress.Environmental protection is not expected to be relaxed, and staggered production continues; the government’s administrative side has not yet made any efforts. If the government increases administrative intervention to reduce capacity, it can further reduce supply stimulus prices.
③ In terms of policy, there is a lot of room for the association and the government to make efforts. The "Cement Industry Capacity De-capacity Action Plan (2018-2020)" states that the concentration of cement and cement clinker production capacity of the top ten enterprises has increased to more than 60% and above 70% respectively. Currently, the top ten clinker production capacity accounts for 57%, and the gap is still large to 70%.
2. Demand side situation
Cement demand is closely related to the investment in fixed asset in the whole society. From the perspective of use areas, infrastructure, real estate, and rural areas generally maintain a structure of 40%, 25%, and 35%, and the ownership of real estate is importantly lower than that of infrastructure and rural areas.
In the 13th Five-Year Plan, the central government clearly stated that GDP growth is more than 6.5%, and the growth rate of fixed asset investment will continue to grow. It is expected that during the 13th Five-Year Plan period, the output of the cement industry may drop slightly, but the range is very limited.
(I) The stimulation of cement production by fixed asset investment is getting lower and lower
Cement production growth is positively correlated with fixed asset investment in the whole society. The growth rate of fixed asset investment began to decline year by year after reaching its peak in 2011, and fell within 10% in 2015, driving the growth rate of cement production also decline year by year.
Analysis of past data shows that the growth rate of fixed asset investment stimulus on cement demand is getting smaller, that is, when the fixed asset investment amount remains unchanged in the future, the demand for cement will decrease year by year. The core reason is inflation, and China's urbanization has passed the primary stage, and non-cement projects in investment will gradually increase.
(II) China's fixed asset investment growth rate shows obvious regional characteristics
China can be divided into six major regions: East China, Central and South China, Southwest China, Northwest China, Northwest China and Northeast China. Among them, East China, , West China, and Southwest have good economic foundations, and the growth rate of fixed asset investment has generally reached double digits in the past decade. The economic situation in North China, Northwest and Northeast China is relatively weak, and the growth rate of fixed asset investment is lower than the national average.
2017 and January-August 2018 were not announced on the official website of the Bureau of Statistics, but based on the announced growth rate of national fixed asset completions, the general trend is still continuing.
In terms of regional perspective, in areas with good economic foundation, fixed asset investment growth rate is high, cement consumption is large, and price elasticity is also high. The regional layout of major cement manufacturers directly determines the degree of benefit of this round of price increase.
① East China: Good economic foundation, the increase in the country's main demand in 2017 is concentrated in South China and East China.
②Southwest: The infrastructure in the southwest region is relatively weak. In 2017, Guizhou's year-on-year growth rate of fixed asset investment reached 20.1%. Poverty alleviation is one of the three major goals of the "13th Five-Year Plan". Yunnan and Guizhou are the main areas for targeted poverty alleviation in my country, and the demand for cement will increase.
③Central and Southern: Including six provinces: Guangdong, Guangxi, Lianghu, Hainan and Henan, the economic growth is good. The leading real estate company in the Guangdong-Hong Kong-Macao Greater Bay Area will drive cement demand in the later stage of rapid land acquisition from 2016 to 2017. The specific plan for the Guangdong-Hong Kong-Macao Greater Bay Area is expected to be released in 18H2.
④ North China: Weak demand. Xiongan New Area construction has not started yet.
⑤Northwest: The growth rate of fixed asset investment is close to the national average, the best among the three northern regions.
⑥ Northeast: It is the region with the fastest decline in demand in the country. It has been a double-digit decline for three consecutive years. In 2017, cement production was suspended for 6 months. Some cement companies in Northeast China have clinker capacity utilization rates as low as 30%, and utilization rates are expected to continue to decline.
3. Supply side changes
(I) The growth rate of national cement investment has maintained a decline, and the capacity reduction has continued
In the past 15 years, the cement industry's production capacity has experienced two rounds of production peaks. The first round was from 2004 to 2005, with the annual production capacity of new clinker exceeding 100 million tons, causing serious overcapacity in East China from 2005 to 2006. The latest peak occurred between 2009 and 2011, with the annual annual production capacity of new clinker reaching more than 200 million tons. After 2012, with the introduction of a series of policies, the new production capacity began to decrease significantly. In the past four years, the new clinker production capacity has decreased by more than 20%. In 2017, the new clinker production capacity was 20.46 million tons, accounting for 1% of the total production capacity.
by region, the new clinker production capacity in 2017 was mainly concentrated in Guangdong and Guangxi. Except for Tibet, which is still in a period of intensive production capacity construction, the impact of new production capacity in other regions is limited. According to the cement industry's capacity reduction action plan, 136 million tons, 116 million tons and 140 million tons were respectively de-capacity from 2018 to 2020, and 2017 became a turning point in the cement industry's capacity to increase and decrease.
(II) Industry concentration continues to increase
According to the Cement Association's "Cement Industry Capacity De-capacity Action Plan (2018-2020)", the clinker production capacity was reduced by 392.7 million tons from 2018 to 2020, 540 cement grinding station enterprises were closed, and the cement and cement clinker production capacity concentration of the top ten enterprises was increased to more than 60% and more than 70% respectively.
The clinker capacity concentration of my country's top ten cement enterprises has continued to increase from 51% in 2013 to 57% in 2017 in the past five years. Currently, my country's clinker capacity is 2 billion tons, and the proportion of capacity removed from 2018 to 2020 is as high as 20%. The industry concentration is expected to continue to increase.
(III) Cement industry associations dominate cement prices, and the vicious competition is no longer
Since 2016, under the dual promotion of supply-side reform and state-owned enterprise reform, it has marked that the integration between my country's cement enterprises has entered a strong alliance stage. , controlled by several major cement giants, has enhanced its control over cement prices, and through the cooperation of market position and administrative power, it has mastered the cement pricing power.
The cement industry is not like the steel industry. The cost of resuming production of steel plants after each suspension of production is less than millions of yuan, while the cost of resuming production of cement plants is relatively smaller. In the past, the cement industry adjusted inventory by reducing prices. Now the industry consensus has been strengthened, and inventory has been adjusted through the suspension and resumption of production. The vicious competition situation is no longer there.
4. Screen individual stocks from regional layout and financial indicators
From the increase in cement prices in different regions, we can know that cement prices in areas with good economic foundation and high growth rate of fixed asset investment have increased significantly, and cement companies whose main business layouts in these regions are also more flexible in performance.
From the supply and demand analysis, we can find that the demand side is not optimistic in the overall environment. This rise in cement prices is caused by changes in the supply side. The supply-side reform of the cement industry is led by the Cement Association and various government departments, and the position of director of the Cement Association is also held by the management of major cement companies. It represents the interests of large cement companies. Small cement companies have a much greater negative impact on performance due to environmental protection issues.
So from the above perspective, the screening of cement stocks must follow two important aspects: is large enough , and is well distributed .
According to the top ten clinker production capacity list in 2017 released by China Cement Network, among which: Jinyu Jidong Cement's business is composed of Jinyu Shares and Jidong Cement, each injecting cement business. Jidong Cement holds 52.91% of the shares, and the joint venture business is consolidated; Taici International delisted; Shanshui Cement has been suspended since April 2015 due to equity disputes; Hongshi Cement has not been listed.
There are actually only seven cement companies that can be analyzed in China Cement CR10. The following mainly compares and analyzes these seven listed companies.
Picture source: China Cement Network
(I) Characteristics of changes in cement prices in various regions of the country since 2016
Since 2016, the national cement prices have started a wave of price increase. Cement prices rose by 29.8% in 2016, and increased by 46.3% in 2017. In 2018, a slight decline occurred against the background of nearly double the increase in cement prices compared with the beginning of 2016.
by region, cement prices in East China led the country from 2016 to 2017, ranking first among the six major regions. Although prices fell in 2018, the absolute value was still at the highest level in the region. Cement companies in this region have the greatest price elasticity.
The cement prices in the first three quarters of 2017 in the central and southern and southwest regions have basically not changed. The price increase has started from Q4 2017. In the first three quarters of 2018, the cement prices did not pull back from the high level at the end of 2017, which means that the year-on-year growth of cement companies in this region in the first three quarters of 2018 will increase significantly.
Cement prices in North China and Northwest China maintained a steady increase, but the increase was still inferior to those in East China, Central and Southwest China and Southwest China. Cement prices remained stable overall in the first three quarters of 2018.
The cement price in Northeast China has risen the slowest. Cement prices have been chasing for a while in the first half of 2018, and then fell sharply, resulting in weak demand.
(II) Regional layout of listed cement enterprises in China
From the perspective of regional layout, China's building materials and conch cement businesses are spread across the country, with clinker production capacity accounting for 87% and 92% of the two regions, respectively, and will fully enjoy this round of increase in cement prices. Nearly half of the clinker production capacity of Conch Cement is located in East China. Cement in East China is ranked first in the country in terms of absolute price and relative increase, which shows that Conch Cement can best benefit from this round of cement price increase.
Jidong Cement is the largest cement company in the north. The clinker production capacity accounts for 90% in the North China, Northwest and Northeast regions. The sluggish demand and severe overcapacity make it difficult for cement prices to rise sharply.
China Resources Cement accounts for 86% of the clinker production capacity in East China, Central and South China and Southwest China, making it the leader in Guangdong and Guangxi. Guangdong and Guangxi are one of the few areas in China where clinker capacity utilization rate is not overweight.
Huaxin Cement clinker production capacity is all located in the central and southwest regions. The price elasticity is average, but since cement prices in central and southern and southwest regions have increased since Q4 2017, the year-on-year growth rate of Huaxin Cement in 2018 will remain consistent in the first half of the year.
China Tianrui Cement accounts for 69% of the total in East China and Central and South China, and 31% of the Northeast. Its price elasticity is better than Jidong Cement but inferior to all other companies.
Asian cement clinker production capacity is located in the East, Central and South China and Southwest regions, and is small and beautiful.
Combined with the above analysis, the list of cement companies' price performance elastic rankings are: Conch Cement, Asia Cement, China Resources Cement, China Building Materials, Huaxin Cement, China Tianrui Cement, and Jidong Cement .
(III) Comparison of financial data and the reasons behind it
From the perspective of gross profit margin and ROE, Conch Cement is at an absolute leading level, followed by China Resources Cement and Huaxin Cement. As the headquarters of Conch Cement, Anhui has second only to Shaanxi's limestone reserves. Conch Cement uses its clever T-shaped strategic layout to acquire small and medium-sized cement enterprises in areas with strong demand such as the Yangtze River and coastal markets, and transforms them into grinding stations. At the same time, large-scale clinker production bases are built on both sides of the Yangtze River with rich limestone resources, such as Wuhu, Tongling , Anqing , Chizhou , etc., to give full play to the cost advantage of Yangtze River water transportation, making the ton of cement cost 20-30 yuan cheaper than its peers.
In the era when Guo Wensan was in charge of conch, he followed a low-profit margin strategy to use cost advantages to suppress his peers. Huaxin Cement was one of the victims. Conch's clinker expanded westward along the Yangtze River to erode to the Huaxin Cement business concentration area.
From the perspective of asset-liability ratio, China Building Materials has the highest level, followed by Hedong Cement, and Conch Cement has the lowest level. Since China Building Materials went public, from 2006 to 2017, the goodwill of RMB 44.6 billion was increased through acquisitions, which is basically equal to the total goodwill of the company on the book; from 2011 to 2013, the acquisition of PB reached more than twice, and these three years were also the three years with the largest amount of mergers and acquisitions in China Building Materials history. At this time, the cement price was at a relatively high level. The goodwill formed by the acquisition in these three years accounted for 74% of the group's total goodwill, and no large-scale provision has been made. The rapid acquisition has also created huge liabilities, with interest-bearing liabilities on the books reaching RMB 194.5 billion as of the end of 2017.
Judging from this year's PE, except for China Tianrui Cement, the other six companies are in the range of 6-10 times, and the difference is not very big.
sorts the advantages and disadvantages from the financial and ROE perspectives, from high to low: Conch Cement, China Resources Cement, Asia Cement, Huaxin Cement, China Building Materials, China Tianrui Cement, and Jidong Cement .
5. Conclusion
cement stocks have strong regional attributes. Once you understand the business characteristics and factors that drive price increases, it will not be difficult to select cement stocks. There are many in-depth reports on individual stocks online. I am standing on the shoulders of giants and sorting out the logic based on my own understanding.
is at the present moment, and the traditional peak season for cement has entered the fourth quarter, coupled with infrastructure making up for shortcomings, it is expected that the rise cycle of cement stocks has not yet been completed.
Currently, there are not many sectors that can be configured in the mid-term based on annual calculations. Cement is one. In terms of target selection, we prefer to choose Conch Cement (600585.SH) , China Resources Cement (01313.HK) , and Huaxin Cement (600801.SH) . Conch Cement A shares have a discount of 14% compared to H shares, and the price of A shares is more advantageous.
Cyclic stocks are traditionally used to "buy when PE is high and sell when PE is low." I have discussed cement and steel stocks with many friends in the past, and my view is "This time I'm different."
There is a phenomenon in speculating in Hong Kong stocks: the stock price can be lower when it is low, and it can be higher when it is high, and so is PE.
Nowadays, the valuations of many cyclical stocks are on the same level as historical lows, but from the perspective of company profit, the factors that drive up profit growth are still fermenting, and the turning point of profit is far from here. What is more likely to be that they have maintained a high profit state for many years.
Under this background, companies with low debt and high cash flow have limited capacity expansion, even dividends can push up the rise in stock prices, and it is highly likely that the above-mentioned cement stocks can continue to hit new highs. (End)
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