Anhui Conch (914.HK): Solid FY13 Results; Raising TP to HK$36.70

What’s new.FY13 EPS increased 48% y/y to RMB1.77, in line with consensus but beating our estimateon strong GP/ton expansion in 4Q13.Net profit rose 48% y/y to RMB9,389min FY13 andrevenue was up 21% y/y to RMB55,262m on a 22% y/y increase in shipment volume of cement products to 228m tons. Gross margin for cement products rose by 5 ppts y/y to 33%, with GP/ton increasing from RMB68/ton in FY12 to RMB79/ton in FY13. Afinal DPSof RMB35fen was declared vs.RMB25fenlast year.

Lower costs offset y/yfall in ASP.Although full-year ASP decreased 1% y/y to RMB237/ton, gross margin for cement products rose by 5 ppts y/y to 33% in FY13 thanks to a 9% y/y decrease in unit costfor soft coal in FY13. Operating leverage was strong in 2H13 with 94% h/h EBIT growth and 34% h/h revenuegrowth. This was mainly driven by GP/ton expanding from RMB77/ton in 3Q13 to RMB105/tonin 4Q13. ROE increased from 13% in FY12 to 18% in FY13.

Capacity expansion to accelerate in FY14.Conch will lift capex from RMB7.5bn (including M&A) in FY13 to RMB8.5bn (excluding M&A) in FY14. The companyhad total cement capacity of 231m tonsat the end of FY13 and plans to add afurther 30m tons in FY14for 13% y/y growth vs.11% in FY13. This bodes well for Conch’s market position as an industry consolidator. Faster capacity expansion should exert pressure on smaller,inefficientplayerssince Conchalready has a cost advantage with an industry-low productioncost of RMB158/ton in FY13. Net-debt-to-equity ratio decreased further from 32% in FY12 to 27% in FY13. We believeConch’s lower-than-peersfinancial leverage should support furtherM&A.

Estimatechanges.Currently cement prices are 17% and 15% higher than last year in Eastern and South Central China respectively, and shipmentshave recovered coming into March. With coal prices still soft, we expect a solid start for Conch in 1Q14. Although overall demand growth may slowamid softening FAI growth, more aggressiveexpansion planscoupled with smaller playersexiting the business should help Conch gain market share. Cement prices held up at their 4Q13 in January, which provides a good start for this year. Meanwhile, the industry’simproving supply/demand outlookshould support cement prices. As a result, we raise our ASP assumptions for the next two years. We also lift volume-growth assumptions in view of more aggressive capacity expansion of Conch. We thus liftour FY14E and FY15E EPS by 14% and 18% to RMB2.24 and RMB2.54 respectively.

Conch remains our sector top pick.We maintain our target 8X FY14E EV/EBITDA, inline with the stock’s historicalaverage, and lift our 12-month target price from HK$33.00 to HK$36.70, for 20% upside. Our target price also implies 16X FY14E P/E, also in line with its historical average. We maintain our Buy rating. Risks to our target price include slower-than-expected FAI growthand further liquidity tightening draggingon construction works and property market.