Cement prices on the mainland market are expected to rally in the fourth quarter on resumptionof large infrastructure projects, helping to improve producers' profit margins, China ResourcesCement Holdings Ltd said after reporting a sharp fall in earnings and profit margins for the firsthalf, dragged down by weaker demand.
Despite turnover rising 9.8 percent to HK$11.03 billion ($1.42 billion) for the six months endedJune 30, 2012, the company's net profit slumped 68.9 percent to HK$635.2 million over thesame period due to sliding selling prices.
The company's HK$635.2 million profit gain was only a quarter of the 2.5 billion-estimates madeby Citigroup earlier. Even though the securities group was bearish than most of its peers on theperformance of China Resources Cement during the past six months, the company stillsurprised the market with an even worse outcome, according to the bank.
Average selling prices of cement - the key binding ingredient in ready-mix concrete widely usedin infrastructure developments - slumped over 10.2 percent to HK$333.9 per metric ton in thefirst half of 2012 from HK$371.7 a year early, according to China Resources Cement, a unit ofChina Resources (Holdings) Co.
Gross margin of cement decreased 15.8 percentage points to mere 21.0 percent during thefirst half from 36.8 percent last year.
Net gearing ratio also climbed to 104.2 percent during the period from 91.3 percent in the firsthalf of 2011. The company estimated that the ratio would reach 110 percent by the end of theyear due to restrained cash flows - a far cry compared with the estimation of an improved 80percent forecasted by the management team earlier this year.
China Resources Cement attributed the lackluster performance to a number of unfavorablefactors including sluggish demand caused by weakened economy and poor weather conditionsin the southern part of China, which led to accumulation of inventory as well as a series of pricecuts.
Bidding on the resumed construction of railway networks with a reported investment of 580billion yuan for 2012 as well as the ongoing affordable homes which targets completion of 5million units on the mainland, cement prices are likely to rebound to HK$340 to HK$350 permetric ton in the fourth quarter this year, Zhou Longshan, chairman of China ResourcesCement said during a media briefing in Hong Kong on Monday.
"Near-term cement prices pressure and earnings revision may still cloud the share performanceand we suggest waiting for share weakness," according to a report prepared by CCBInternational Securities Group.
"We expect cement consumption to pick up driven by monetary loosening and on-going policyfine-tuning, while the lower coal prices would be an additional catalyst for earnings recovery,"said the report.
But oversupply has become an issue haunting the whole mainland cement industry. A numberof mainland cement producers have posted profit warnings in Hong Kong over the past monthson the shrinking demand and decreasing prices.
Dongwu Cement International Ltd that listed in Hong Kong this June issued a profit warning inearly August - 49 days after its initial public offering.
Anhui Conch Cement Co, China's biggest cement maker, also warned in June that its net profitwould fall by more than 50 percent due to weak demand and falling product prices.
Other cement manufacturers on the mainland, including China National Materials Co, ShanshuiCement Group and Gansu Qilianshan Cement Group Co, have all posted similar profit alertsthis year.
"Producers in some regions attempted to implement collaborative price hikes. Meanwhile, theindustry remains in its slack season, with no obvious improvement in demand," said a CiticSecurities report on Monday. "Given prices are already close to breakeven level and someproducers are even at loss-making levels, so the downside in prices may be limited."
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