Anhui Conch:Entering an expansion phase

Accelerating growth at home and abroad. Anhui Conch(Conch) is planning to add around 30m tonnes of cementcapacity in 2014F organically, a 13% YoY increase. Weexpect cement sales volume in 2014F to increase 12% YoYto 28m tonnes, with the utilization rate rising 2ppt to88% YoY. Conch, in our view, is the only viable consolidatorleft in the industry given CNBM’s debt constrains. Along withM&A at home, overseas expansion is also likely to continue.For instance, Conch is planning to build 10m tonnes ofcement capacity in Indonesia in 3-5 years. Vietnam andBurma are also potential overseas markets for the firm.

Avoiding concrete in favor of aggregate. Unlike thelow-profit concrete business associated with low-entrybarriers and chronic receivables problems, the aggregatebusiness is considered profitable (30% gross margins) and isnow a hot segment. Conch added 2.5m in aggregate capacityin 2013 bringing its total to 4.5m tonnes, which in 2013generated RMB23.4m in revenue with 30% gross margin.Conch plans to expand aggregate capacity to 100m tonnes in3-5 years and has set a 2014F sales target of 10m tonnes.

Solid 2013 results. Conch’s FY13 EPS was up 49% YoY toRMB1.77, in line with consensus and the company’s earlierprofit alert. We attribute the result to stronger-than-expectedsales volume growth (up 22% YoY to 228m) and marginexpansion (GP/tonne up 19% to RMB80).

Maintain Outperform, raise 12-month target price toHK$41.16. We raise our 2014F/2015F EPS forecasts14%/6% to reflect strong growth and improving margin. Ourtarget price translates to 13.8x 2014F P/E, 2.6x 2014F P/Band RMB762 EV/tonnes. 。

Investment risks: (1) Slower-than-expected domesticacquisitions; and (2) political risks in overseas markets