CHINA: Anhui Conch: Best in Class, But Unloved

China has used more cement between 2011 and 2013 than the U.S. has consumed in the entire 20th Century, so you can be forgiven for worrying about a glut of the building material in China.

Those fears are exacerbated when Beijing announced today that China’s economy grew at 7.3% in the third quarter, the slowest pace in five years. Cement producers’ major customers are real estate developers, and builders of highways and railways and other infrastructure, so the mounting concerns about China’s debt, pollution and potential housing over-capacity have weighed on cement stocks like, well, so many tons of concrete.

Against that grey backdrop, the third-quarter earnings reported last night by Anhui Conch Cement looked surprisingly uplifting. Analysts fearing the worse had expected per-share earnings to decline, but Anhui Conch ( 914.HK and 600585.CH) reported a 1% growth in earnings compared to levels a year ago. Cement sales volume grew 15% year-over-year, and coal-price weakness helped margins. For the first nine months of the year net profit growth was a much healthier 52% higher than a year ago.

The stock is up just 0.8% Tuesday afternoon, but Anhui certainly can build on that foundation. For a start, much of the bearish assumptions surrounding cement producers have been built into Anhui’s stock price, which has already corrected 17% since July. Bears were quick to pounce on the 7.3% third-quarter GDP growth, but that number was still a bit better than the 7.2% economists were expecting. More important, the country’s urban fixed asset investments also grew 16.5% year on year, up from last month’s reading 16.1%. While it’s clear that Chinese reforms are pointing in the direction of consumption and services and away from construction, fixed asset investments aren’t about to fall off a cliff.

Anhui Conch trades at nine times what it has earned, which seemed more expensive compared to multiples of roughly five times for rivals like China National Building Material’s ( 3323.HK ), six times for BBMG Corp ( 2009.HK ), and eight times for China Resources Cement ( 1313.HK ). But Anhui has a far stronger balance sheet, with total debt to total assets at a strong 24% - compared to 64%, 31% and 38%, respectively, for said rivals.

Then there is Anhui Conch’s market exposure by region. With slightly more than half of its capacity focused on the East China market, it has zero exposure to North and Northeast China, regions that are the targets of pollution controls. The rest of their capacity is spread between Central, Southern and Western China. While CNBM is also diversified across the country, CR Cement has a focus on Southern China and BBMG has its foothold in North China.

Barclays notes that despite market expectations of only moderate cement price rises in the fourth quarter, and probable sluggish demand growth going forward, the “well-controlled production costs and better-positioned local market for Anhui Conch suggest that earnings and cash flows should be sustained in the medium term.” Barclays also believes Anhui Conch’s strong balance sheet puts the company in a good position for “potential consolidation and market expansion”.

But are Anhui Conch’s advantages already priced in? Maybe not. China consumed a lot of cement between 2011 and 2013, as Vaclav Smil pointed out in his book Making the Modern World: Materials and Dematerialization. But building won’t grind to a halt. Already, exports account for nearly 3% of its sales, and the company is building production in Indonesia and is simultaneously looking to expand overseas with potential new operations in other countries such as Vietnam and Myanmar.

With its market cap roughly equal to US$15 billion, Anhui Conch is already nearly the size of the globally diversified players like Holcim (HOLN.Switzerland) from Switzerland and France’s Lafarge (LG.France). Their price earnings ratios attract significantly higher multiples of 18 times and 26 times, respectively. If Anhui Conch can accelerate its overseas business, the stock – and its valuation multiple – are due for a re-rating.

One question for prospective investors in Anhui Conch, for those who currently have the choice, is whether to buy the Shanghai-listed A shares (600585.CH) or the Hong Kong listed H shares ( 914.HK ). Currently, the A share trades at a 14% discount to the H share, but the premium is likely to disappear once the two exchanges are connected in the near future. In other words, the A share is the more solid value.

INDIA: JK Cement, UltraTech place bids for supplies to concrete road projects

Cement majors JK Cement and UltraTech are understood to have placed bids for supplying cement to the ministry of road transport and highways (MoRTH) for its plan to construct concrete cement roads.

According to sources, the two firms are among the first few to place their bids in response to the global tender floated by MoRTH for cement procurement for the next one year.

The tender, which will close on October 24, has invited companies to provide rates on per bag and per metric tonne basis for the next one year.

Road transport and highways minister Nitin Gadkari had stated his preference for concrete cement roads as opposed to bitumen.

The ministry is also considering entering into rate contracts with companies to buy concrete and cement so that builders and contractors can acquire the material at cheaper rates. Currently the cement rates range from R330 per bag to R390 per bag across the country and similarly, R33,000 per metric tonne to R39,000 per metric tonne.

In an interview to FE earlier, Gadkari had said that "the country now needs to shift focus on technology and better management practices which help us build safe roads, lesser cost of construction, faster implementation and longer life of highways with low or minimum maintenance. That is why we have decided to build rigid concrete roads instead of flexible bitumen roads. These concrete roads will be cheaper on life cycle cost compared to bitumen. To further bring the cost down we have called a global tender for cement rate contracts".

“The ministry has been evaluating cost options for various projects to use concrete cement where there is a lower life-cycle cost, after which it decided to call for this tender,” sources said.

Once the tender closes, the road ministry or National Highways Authority of India (NHAI), or a government procurement agency, could sign rate contracts with cement manufacturers and they will then supply cement at this fixed rate for the next one year to either NHAI for the government road projects or to companies which will be building highways on the BOT mode.

Typically in a rate contract, the price of a material is finalised in advance by the procurement agency and vendors. As and when the procurement agency or its arms require the product, the vendor supplies it at the agreed rate. This also involves commitment on volumes. Procurement of large volumes for national highway projects raises the possibility of discounts.

Usually, concrete cement roads cost less than bitumen surfaces on a life-cycle basis (over a 20-year period). Though the initial outlay on concrete roads is higher, the maintenance costs are less, said a government official.

In bitumen roads, the reverse is the case. Depending on various factors, including the location of the road, the initial cost of building a concrete road could be higher by 5-30%. On the other hand, the bitumen roads have a lower life-cycle costs and the private developers managing long-term (20-30 years) projects have so far avoided building concrete cement roads. The exceptions include those who won the rights to make six-lane roads out of four-lane ones built with concrete cement.

NIGERIA: Cement dwarfs peers in non-metallic products sector

Cement is leading the chase in Nigeria’s non-metallic products sector, which also includes ceramics, chalk and glass.

Total output in the non-metallic products sector rose from N143.86 billion in the first half of 2013 (H1 2013) to N215.79 billion by the second half of the same year (H2 2013). Similarly, capacity utilisation in the sector rose 16 percent to 69.9 percent in H2 2013, from 53.8 percent in H1 2013, according to data from the Manufacturers Association of Nigeria (MAN).

The sector also recorded a robust performance in terms of raw materials sourcing, as local input content rose from 79.55 percent in H1 2013 to 91.48 percent in H2 2013.

Investments in H1 2013 within the sector broadly totalled were N323.76 billion in H1 2013, while N4.93 billion worth of investments were added in H2 2013.

“ The cement group , which has been leading the manufacturing sector, has contributed largely to the increases,” says MAN.

Currently, cement capacity of the country has reached about 44 million metric tonnes per annum (tpa). Dangote Cement’s capacity is 29 million capacity, having recently added nine million to its 20 million tpa.

Lafarge Africa’s businesses, involving the recent combination of its Nigeria and South Africa businesses, now totalled 12 million tpa. Lafarge Africa has major stake include Ashaka Cement plc and the United Cement Company of Nigeria (UniCem).

In 2010, BUA International Limited, which acquired Edo Cement, is believed to have a capacity of 2.5 million tpa. BUA signed an agreement for the construction of a $500 million new plant and ancillary projects at Edo Cement situated in Okpella.

On the other hand, the Cement Company of Northern Nigeria (CCNN) is believed to have about 600,000 tpa.

The cement industry is currently robust, dwarfing South Africa’s capacity that stands at 18.3MTs and closing in on Egypt’s 48MTs. Expansion projects among the players are on-going.

The United Cement Company of Nigeria (UniCem) is investing N84 billion in an additional 2.5MT cement line project to double its 2.5MT existing capacity to 5MT per annum by 2016, and consolidate its position as Nigeria’s third largest manufacturer.

Also, Ashaka Cement is investing N100 billion to increase capacity to 4MT per annum, Real Sector Watch has gathered.Renaissance Capital attributed the growing fortunes of the sector to beneficial government incentives, notably the Backward Integration Policy (BIP), which initially limited cement importation to market players committed to developing their own domestic production capacity. They also add that eventual outlaw of finished cement importation as well as aggressive infrastructure development around the country have ramped up the growth of the industry. Other stakeholders also concur.

“The backward integration policy of the government along with the strong support of Ministry of Trade, Industry and Investment has been a catalyst for the growth of the cement sector. It should be emulated in other manufacturing sub-sectors as a role model,’’ said Olivier Lenoir, managing director, UNICEM.

SOUTH AFRICA: PPC shareholder says new board needed to pursue Africa strategy

Foord Asset Management will send a second letter to PPC to demand a special shareholder meeting to elect a new board within a month.

PPC, South Africa’s biggest cement maker, needs a new board to keep expansion plans on track following the resignation of Chief Executive Officer Ketso Gordhan, according to shareholder Foord Asset Management.

“It’s critical that the board be replaced with a functional board as soon as possible to restore continuity to the operations strategy and employees at PPC,” Carolyn Levin, a portfolio manager at Cape Town-based Foord, said by phone today. “We aren’t siding with former CEO Gordhan.”

Gordhan resigned on September 22 after less than two years as CEO, citing differences of opinion with fellow directors over matters including his intention to fire an unidentified senior executive. He said on September 29 he would return to his post if he had the backing of shareholders. The Public Investment, PPC’s biggest investor with a 12% stake, said Sept. 30 it was in “total support” of the board and the company’s strategy.

Foord, which Levin said owns more than 5% of PPC, plans to send a second letter to the company this week to demand a special shareholder meeting to elect a new board within a month. A request sent earlier in October was “rebuffed,” Levin said.

“We want a new board and will leave leave it to them to choose a new CEO,” she said. Foord has met with Executive Chairman Bheki Sibiya and Gordhan in recent weeks.

Africa expansion

PPC shares traded 2.7% higher at R28.51 as of 4:18 p.m. in Johannesburg. They declined about 15% after Gordhan’s resignation to the close on October 17.

“It doesn’t send a positive message to the investors in the short to medium term,” Andy Gboka, a London-based analyst at Exotix Partners LLP, said by phone. “Although Bheki Sibiya has now become Executive Chairman, we think Ketso’s resignation leads to a void in strategic decision making and weakens the company’s ability to react quickly.”

Under Gordhan’s leadership, PPC has expanded its presence in Africa to offset slowing growth in its domestic market. The company has boosted its presence in countries such as the Democratic Republic of Congo, Algeria and Ethiopia as it targets 40% of sales outside South Africa by 2017.

“PPC is below average when it comes to communicating on the company’s strategy and business,” Exotix’s Gboka said. “We still lack regional breakdown, precise guidance on expansion to better gauge the company’s intrinsic value.”

The company has “nothing further to add to what has been said,” a spokesman said in an e-mailed response to a request for comment.

UAE: RAK cement factory closed for one month

The Ministry of Water and Environment has closed a cement factory for one month in Khor Khuweir in Ras Al Khaimah.

The factory violated rules under Cabinet Resolution No 24 of 2011 that regulates activities in the cement industry.

Ghanem Al Shamsi, from the ministry, said the decision came after specialists from the external audit department visited the factory’s facilities.

The visit was part of efforts to evaluate efficiency in implementing federal legislation to enhance environmental sustainability. Auditors reported a number of violations.

Such visits are part of the ministry’s strategy to improve environmental performance and promote environmental sustainability.

RWANDA: Savannah Cement Producer Eyes Rwanda Market

Savannah Cement, a Kenyan cement producer, is set to begin operations in Rwanda early next year, once it gets the approval from the Rwanda Standards Board (RSB).

Speaking on the sidelines of the just-concluded East Africa Business Summit in Kigali, Savanna's Ronald Ndegwa, said the company was attracted to the Rwandan market because of its vibrant nature and the country's attractive investment climate.

"We are required to test and certify our cement before we can enter the market. That's why we are looking forward to the harmonisation of standards across the East African Community bloc, where if a firm has certification from the Kenya Bureau of Standards, for example, is not subjected to another certification process to avoid such delays," he noted.

He said that once RSB is done with the testing in the next two to three months, they will identify local distributers who can access the product and serve other retailers like contractors and government projects in order to have them penetrate the market.

"Ultimately, as the market grows, if it becomes viable to open a grinding station here we will open one," he said.

The firm, with a capacity to produce 1.5 million tonnes of cement per year has operations in Ugandan, South Sudan and northern Tanzania. Once in Rwanda, the company will compete with local producer, Cimerwa and Ugandan-based Hima Cement, a factor Ndegwa believes will lead to affordable prices thus boosting the housing sector.

According to the Ministry of Trade and Industry estimates, local demand for cement is at 400,000 tonnes a year. Cimerwa currently produces 110,000 tonnes of cement and Hima supplies about 200,000 tonnnes annually.

Savannah Cement's entry could be a huge relief for the real estate sector that has long complained about low cement supplies and high prices.

Central bank statistics for the first quarter of 2014 indicate that the construction sector recorded a 8 per cent growth, a trend which is likely to continue as the general economy recovers from last year's slowdown.

GHANA: Deadline for cement retailers to reduce prices

Cement manufacturer, Dangote, says it expects all retailers of their products across the country to reduce the prices by 2cedis 70 pesewas by Friday October 24.

This comes after concerns that despite the announced reduction of prices of cement by all three cement producers in the country, retailers have failed to comply.

Dangote reduced the prices of their product on October 9, a day after Diamond Cement and GHACEM reduced the price of their products by 2 cedis each.

The gradual appreciation of the Cedi against the dollar and other major international trading currencies for some time now, has contributed to the downwards review of prices.

Speaking to Citi Business News, the Sales and marketing manager of Dangote Cement Joeseph Kobina Abu said “so most of the stock you find in the market now were bought at the old price which was the high price relative to the low price…in this case I will not expect the reduction to happen in two days or three days but rather a week.”

According to cement retailers, any immediate reduction will lead to losses since they still have old stock before the announced reduction.

Confirming the challenge to Citi Business News, Joeseph Kobina Abu stated that, “all the cement companies have reduced their prices, but you know, in the cement business, the customers are made to pay in advance before they are supplied.”

Meanwhile another cement company Diamond Cement is expressing concerns about the growing importation of cheap, sub-standard Chinese cement onto the Ghanaian market.

According to the assistant Commercial Manager of Diamond Cement Philemon Baiden , the situation has led to a drop of 30% in sales.

“Government has allowed a lot of Chinese importation, which is more cheaper than what we are producing here … definitely Ghanaians will go in for them , they don’t even look at the quality ,” Philemon Baiden stressed.