Lowering Anhui Conch Cement Fair Value Estimate on Weaker Earnings Growth; Shares Still Attractive

Narrow-moat Anhui Conch Cement’s third-quarter net profit of CNY 2.6 billion, which declined 65.3% year on year, was below our expectation. The disappointing performance was attributable to falling sales volume and rising energy costs. The cement industry was hard hit this quarter, with Conch’s peers also delivering sharply lower earnings and even making losses. We have lowered our fair value estimate to HKD 50 per H share (CNY 46 per A share) from HKD 68 (CNY 59) after considering the weaker yuan, lackluster cement demand, and higher fuel costs. While we still expect a recovery for the sector, we think it will be slow and subdued, given China’s sluggish economic growth. Despite the cut in our valuation, Conch still provides huge upside, in our view, but the share price may stay subdued in the near term pending more policy news to support the real estate sector. At the current price, Conch’s H shares are trading at 0.5 times 2022 price/book and a decent yield of more than 5%.