Cement:The bell for 2015-We see margins to fall; downgrade Conch and CNBM to SELL

We believe that Chinese cement demand will start falling in the easternhalf of the country next year. This will put pressure on margins, leading toan earnings downgrade cycle, which will overshadow low valuations afterthe recent de-rating. We downgrade Conch from BUY to SELL, CNBM tofrom U-PF to SELL, CR Cement from BUY to U-PF. We forecast earnings tofall 12% on average in 15CL, which are 15% below consensus. We expectShanshui to benefit from consolidation, but valuations are stretched.

Demand passing the peak。

We expect cement demand in the east half of China to start falling in 2015.

We believe demand from residential housing construction will start declining from2015, facing two structural issues: sales falling to lower sustainable levels, anddeclining young population.

Investments in roads, railways and social housing are unlikely to accelerate, due tohigh bases, falling returns and local government funding constraints.

We expect the demand in the east, the northeast and the north to fall the most.

Capacity closure is likely slow。

New capacity growth in most regions will be very small, expect south China, wherewe forecast 4% capacity growth in 2015.

The government is likely to continue cutting the low-hanging fruit, closing thecement grinding, rather than NSP clinker capacities, which determine the margins.

It will be a long process for the market to phase out the NSP clinker capacities,which are new and still profitable.

Industry consolidation is likely to remain slow, but we see more consolidationpotential in Shandong post the CNBM-Shanshui deal.

Margins set to decline。

We forecast cement margins to decrease in most regions from 2015, and expectthe margins in the east and south to fall the most.

We believe margins in Shandong to be higher from current low levels with moreconsolidation potential in Shandong, and margins in Hebei to be stable in 2015.

No country for old men。

We downgrade Conch from BUY to SELL, CR Cement and BBMG from BUY to U-PF,and CNBM from U-PF to SELL.

We had been positive on the equities, on rising expectation of policy loosening, andwe believe that this expectation has peaked out.

Valuations have de-rated, but we believe downside earnings risks will have biggerimpact. Our earnings forecast are an average of 15%below consensus estimates.