Anhui Conch:Beneficiary of the M&A theme

50% YoY earnings growth in 2013F. Conch indicated in its positive profit alert yesterday that it is likely to have achieved 50% YoY earnings growth in 2013F, 7.5% higher than our estimate and 7.3% above consensus. We attribute the result to stronger-than-expected sales volume and cement prices in 4Q 2013.

Beneficiary of M&A. China’s cement industry is becoming more concentrated as leading producers engage in M&A to boost pricing power through volume growth. Conch might be the only deep-pocket consolidator left in the industry given CNBM’s debt constrains. It is expected to achieve above-peer volume growth in the next three-to-five years by leveraging its strong balance sheet, healthy operating cash flow and low gearing. Conch is planning to add around 30m tonnes of cement capacity next year.

Improving industry fundamentals. New capacity additions in 2013 came to 102m tonnes according to Digital Cement, 15% below the market and our expectation. Better supply control, stricter emission standards, accelerating closures of obsolete capacity and sustained demand should underpin healthy sector fundamentals in 2014F.

Maintain Outperform, raise 12-month target price to HK$36.43. We raise our 2013F EPS estimate by 8%. Our target price translates to 14.1x 2014F P/E, 2.3x 2014F P/B and RMB686 EV/tonne. We view any price weakness in winter low season as a buying opportunity. Investment risks: (1) Lax execution of supply-control policies; (2) slower-than-expected sales volume growth.