Asia Cement (China) Holdings Corp plans to more than double its cement production capacity by 2010 to meet strong demand as China rebuilds quake-hit areas, says Chief Executive Tsai Hsiung Chang.
Fresh from raising US$238 million in a Hong Kong initial public offering in May, Asia Cement plans to invest US$600m to boost its total cement production capacity to 20Mt from the 8Mt now, Chang told Dow Jones Newswires in a recent interview.
Asia Cement, a spinoff from Taiwan’s Asia Cement Corp., does much of its business in the Yangtze River region and also in Sichuan province, which suffered the worst damage from the devastating earthquake in May.
"We are bullish on the cement market outlook as demand for higher-grade cement will increase, given there are huge amounts of reconstruction work after the earthquake," Chang said.
Cement prices in Sichuan were capped after the quake to prevent price-gouging, but Asia Cement’s proximity to the market gives it the advantage of lower transportation costs. Chang said cement prices are rising elsewhere along with an increase in infrastructure and real-estate projects.
"The cement supply in China remains tight after Beijing implemented policies to eliminate small-scale cement producers, particularly those using outdated technology," he said. China has been shrinking the industry in large measure to reduce pollution from outdated plants.
Asia Cement will fund its expansion from internal cash and bank loans, Chang said.
Asia Cement recently reported its first-half net profit doubled to CNY171.81 million (US$25 million) from CNY84.71m a year earlier on higher cement prices and increased output.
Chang said he expects the company’s cement sales volume to reach 18 million tons by 2010, nearly double this year’s target of 10 million tons. It sold 8.25 million tons of cement last year.
Despite the company’s bullish outlook, analysts warn that higher coal and electricity prices could pressure profit margins in the Chinese cement industry.
SinoPac Securities analyst Jay Zhou has a neutral rating on the sector because of rising energy costs, but he has an outperform rating on Asia Cement because of its exposure to Sichuan province.
"Cement prices in Sichuan are much higher than the national average because it is not easy for other cement producers to transport cement to Sichuan due to high transportation costs," Zhou said.
"The great demand due to post-quake reconstruction will further spur cement demand in the second half," he said.
Asia Cement said that coal and electricity expenses accounted for 49% of its total costs in the first half. But Chang said the company had a gross margin of 32% that it hopes to maintain by passing on some cost increases to customers in markets where it can.
Chang also said the company could seek acquisition opportunities in China, although it doesn’t have any targets identified at present.
"Our expansion strategy will first focus on organic growth, but we are open to buying other cement producers if we can find good opportunities," Chang said.