China Shanshui Cement 1H hit by lower prices

China Shanshui Cement 1H hit by lower prices

China Shanshui Cement recorded a YoY drop in net profit attributable to shareholders in the first six month of 2013, as the group faced pricing pressures in key operating regions.

Net profit attributable to equity shareholders for the six months ended 30 June 2013 dropped 52.2 per cent YoY to CNY348m. The basic and diluted earnings per share were CNY12 cents.

Revenue was CNY7.07bn, a decrease of 4.2 per cent from a year earlier. Gross profit margin dropped to 22.7 per cent from 24.9 per cent in the same period last year.

During the reporting period, the sales volume of cement of the Group increased by 9.3 per cent YoY to 22.98Mt while clinker sales rose by 0.6 per cent to 4.2Mt. 

Pricing pressures

The regions of Shandong and Northeast – the group's major profit-generating areas – suffered from a slowdown in the growth of fixed asset investment as well as cement overcapacity in neighboring provinces. As a result, cement prices declined and affected the group's profitability. In the first half of 2013, the cement average unit selling price of operating companies in the Shandong Region was CNY243.7/t, representing YoY decrease of 13 per cent. In the Northeast Region the average price fell 9.1 per cent YoY to CNY274.0/t. In Shanxi and Xinjiang regions, prices were down by 6.8 and 6.4 per cent, respectively. 

New capacity

Two newly added projects were put into operation during the period, including a 4500tpd clinker  line project with a 2Mta cement grinding line at Jincheng Shanshui Heju Cement Co. Another grinding line at Shule Shanshui Cement Co with an output of 1Mta was also started. As at 30 June 2013, the group had a total cement and clinker capacity of 92.64Mta and 40.39Mta, respectively. 

Target price cut

Credit Suisse has now cut its target price for China Shanshui to HK$3.9 from HK$4.2, and maintained its "neutral" call. The house said net debt increased 10 per cent to CNY13.5bn, reaching 150 per cent net gearings.

Morgan Stanley, meanwhile, trimmed its target price for the company to HK$2.7 from HK$5.2, and downgraded the stock to "underweight" from "overweight". The house said Shanshui's 1H EPS of RMB0.12 was 19 per cent below its estimate, and also higlighted that net gearing continued to rise. The research house expects declining profitability in 2014 and net gearing should rise further in 2H 2013-2014. It is also incurring higher employee-related expenses because of early preparation for the 10 clinker lines under construction.

Outlook

On the company’s outlook for the remainder of the year, Zhang Bin, chairman and Ggeneral manager of Shanshui Cement, said: “Looking ahead, the [Chinese] cement industry is still facing relatively big challenges. However, the continuing promotion of urbanization and infrastructure development by the Chinese government will provide a sustained and steady support to the cement industry.

"The group will continue to consolidate its core markets, explore new markets and enhance its brand recognition. We will also reinforce our efforts in internal control and management, minimise procurement costs and enhance market competitiveness. Meanwhile, we will continue to improve the industrial strategic layout and strengthen the regional control advantage.”