Shanshui Cement:Game of control

Shanshui Investment likely to remain in control

Facing challenges from Tianrui, we believe Shanshui Investment willremain the controlling shareholder of Shanshui Cement, with likelycontinuous support from CNBM and Asia Cement. However, visibility onresuming share trading remains low, as the company needs to find a wayto deal with the low public flow. There has been an acceleration ofconsolidation in the Chinese cement sector recently, and we believeBBMG (BUY) is best positioned to benefit from the momentum.

Tianrui – the aggressive suitor

The Tianrui Group recently proposed to change five out of total six boardmembers of Shanshui Cement, replacing them with executives of TianruiCement, with no explanation offered. We believe this is aggressive, as TianruiGroup – although being the largest shareholder – owns just 28.2% equity inShanshui Cement.

Asia Cement - a responsible shareholder

There is speculation that Asia Cement Corporation would become an ally toTianrui Group to gain control of Shanshui Cement, from Shanshui Investment.

We believe this is unlikely. As a responsible investor with 20.1% shareholdingin Shanshui Cement, we believe Asia Cement would prefer ShanshuiInvestment, which can provide better continuity of operations, and betterprotect the value of Shanshui Cement.

CNBM – ally of Shanshui Investment

CNBM was introduced to becoming a shareholder by a placement of newshares in November 2014, mostly because of the support of ShanshuiInvestment. We believe such cooperation and mutual understanding betweenCNBM and Shanshui Cement will continue. The coordination between cementproducers in Shandong province has improved since CNBM became a 16.7%shareholder of Shanshui Cement.

Shanshui Investment - lots of work to be done

We believe Shanshui Investment will remain in control of Shanshui Cement,with likely continuous support from Asia Cement and CNBM. ShanshuiInvestment still has to fully convince other shareholders, so that they canvote against the requisition from Tianrui. And then it needs to find out a wayto deal with the low public float of Shanshui Cement, either by new shareissues, or certain shareholders selling down more stock.