Cement industry: shipments are acceptable but prices are weak

In November, prices in some regions weakened in varying degrees. The national average cement price was 378 yuan, a decrease of 3 yuan from the end of October and 34 yuan from the highest point in May. The price of Zhongnan Cement has weakened. Prices in some areas in Hubei, Jiangxi, and Hunan have dropped by RMB 20-30. Prices in Northeast China have fallen since October, and have dropped by RMB 30-50 in late November. The current price is above RMB 420. . The shipments in East China and South China are still acceptable, indicating that the downstream demand is still there, but the price performance is weak, indicating that the demand is not strong. In terms of inventory, the central region is moderately low, with 65-70% of southern reserve capacity, and the eastern region is relatively high.

Since November, cement stocks underperformed the broader market, mainly related to the gradual weakening of prices after November. In October, we saw a turnaround in macroeconomic policies. We recommend investors to participate in the rebound. The average increase in the sector is 15%, which outperforms the broader market by 10%. In November, the northern region will first enter the off-season, while the southern region will gradually enter the off-season in December. The cement price will begin to adjust in the off-season. The increase in coal prices and the increase in the cost of stopping kiln will cause toll costs to increase and further reduce the gross profit per ton. We believe that in the short term, the stock price lacks a positive catalyst.

Profitability in the first quarter of next year will reach the bottom of the cycle. We believe that from now until February next year, macroeconomic growth is falling under the strict control that lasted for two years, and the profitability of the cement industry will also explore the cyclical bottom during this period, under a more pessimistic scenario. Conch Cement's gross profit for the first quarter of next year will be 100-110 yuan, which is lower than the level of 124 yuan in the first quarter of this year. Looking at the full year of next year, the business climate and profitability will be high and low, and we maintain our assumption of 120 yuan per year for gross profit.

There are two basic judgments that indicate that stock prices are breeding opportunities in the midst of decline: 1. East and Central China market synergy will continue to play an important role in the first quarter of next year, resisting a sharp drop in regional prices, so the cyclical bottom of the first quarter will be a higher level. At the bottom, we do not think that profitability will return to the level of the first half of 2010; 2. The loosening of certain industries such as railways and the gradual loosening of future credit policies will be reflected in the real economy after 3-6 months. Up, economic growth and improvement in cement demand in the second half of next year will be a high probability event. Therefore, although the stock price may be tested in the short-term exploration of the fundamentals, it is not far from the bottom. In the previous report, we pointed out that for the market replacement cost of RMB 400-450, Conch A's share price range was RMB 14-16, and the H share price range was HK$18.3-19.5.

Long-term investors buy on a bargain, but they need to grasp the rhythm and need to be patient. In general, due to the slowdown in economic growth and the off-season factors, cement stocks face greater risks than opportunities in the short term. Under current prices, it is recommended that heavy holders and long-term investors buy on a bargain. A shares recommend Conch Cement, Jidong Cement and Huaxin Cement, and H-shares recommend China Building Materials and Conch Cement.