The historic building boom that made China the world’s largest cement user left cracks among its cement makers. So it is encouraging that government-led consolidation is now providing an opportunity for the industry to emerge with a stronger foundation.
Hong Kong-listed Anhui Conch, one of the country’s largest cement producers, last week said it would buy 16.7% of West China Cement, also Hong Kong-listed, for about $200 million. The two companies combined have half of the market in a key central Chinese province.
The deal follows at least three others in the cement industry this year, plus 12 in 2014. This burst is long overdue. Cement is a naturally oligopolistic business where too many companies in one region can’t chop up rocks profitably.
On average globally, three companies control 71% of cement capacity, says Deutsche Bank’s Johnson Wan. But China has 593 cement producers, with the top three accounting for only 30% of nationwide capacity. Marginal factories have squeezed industry profits, and emitted too much pollution.
That is why as part of its antipollution efforts, the government in 2013 banned new cement projects. It also tightened emissions and product standards to the detriment of small producers. Banks cut credit to small players, too.
Skeptics will note that China has tried and failed to consolidate the industry before. But the environment this time is more favorable. China’s housing downturn has hit cement sales, driving prices down by roughly 20% in some cases from a year ago. National inventories climbed to a record high in mid-June, says Jefferies.
Investors could play potential takeover targets such as Hong Kong-listed TCCI International Holdings, which operates plants in eastern and southern China and trades at an undemanding 10.2 times forward earnings. But given that listed companies make up just 5% of China’s cement makers, most targets may not be in the public eye.
The other option is to focus on the listed potential buyers. State-controlled Anhui Conch has the strongest balance sheet in the industry, its net debt at 8% of equity as of December, compared with an average 164% at its five closest peers. With operations across China, it can benefit from lower competition in many parts of the country, too.
There is always the risk that in the short term, Anhui’s stock will be punished over fears it is overpaying as it sweeps up targets. But the longer-term advantages seem worth it, especially if Beijing also stimulates investment that boosts cement sales.
And Anhui Conch’s Hong Kong shares, flat for the year, have missed China’s stock mania. They go for just 10.5 times forward earnings, less than the 13.2 times average at eight other Hong Kong- and Taiwan-listed cement makers, not to mention its own 15-year average. They are a cheap option for investors to consider as China finally tries to cement ties in this oversupplied industry.
No comments:
Post a Comment