Primary operating region of China Resources Cement is Southern China including Guangdong, Guangxi, Fujian, and Hainan. However, together with the slowing down fixed asset investment (FAI) of the State, we have seen the FAI growth of the above regions except Hainan has remained stagnant since 2H09.

Coal price is expected to rise in 2010 that the ASP of coal purchased in 2009 was HK$ 587 per ton which has been lifted to HK$ 620-630 per ton in 1M-2M 2010. Higher coal price can drive cement ASP as a result.

We recommend “Hold” for China Resources Cement, considering the slowing down FAI in coming future and not surprising 09 financial results. With 15x 2010E P/E, this implies 12-month target price of HK$ 3.98.

In-Line 09 Result

Turnover increased by 19.5% year-on-year (yoy) in 2009. Thanks to the better control of the costs of production, gross profit surged 54.8%. The lower production costs were attributed to the improved production technology and lower unit coal consumption in the clinker production process from the average of 171.4 kg/ ton of clinker in 2008 to 160.8 kg/ ton of clinker in 2009 that was down 6.2%. We think China Resources Cement is capable to lower the gross margin further as coal plus electricity costs contributed approx. 40% of the total costs of sales and the company is exploring possibilities to lower coal cost through technologies upgrade and expand the sourcing channels. They are looking for coal supply from Northern China in which the coal has better quality but is more expensive. This may allow the company to perform experimental tests on blending high quality coals with less expensive coals so as to reduce the net production costs. Electricity cost dropped by 8.1% to HK$ 37.8/ ton of cement due to lower electricity consumption and the cost reduction from the use of residual heat recovery generators.

Yet, the yearly growth rate of operating profit slowed down from 68.5% in 2008 to 31.2% in 2009. This was primarily due to the absence of one-off gain – exchange gain in 2009. Since HKD is the reporting currency and RMB/ HKD has been steady throughout the year, there is no exchange gain in 2009 while the company booked HK$183.6mn for the exchange gain in 2008 (contributing 20% of the total operating profit). In view of RMB appreciation in 2010, the company should record higher exchange gain in 2010.

Gearing ratio declined substantially from 164.65% in 1H09 to 28.9% as of Dec 09, after the company received IPO proceeds of HK$ 64.75bn in Oct 2009. It is expected that China Resources Cement will not have financial pressure in the near to medium term and there is no immediate need to increase bank loans as said by the company.

Slowing Down FAI

Primary operating region of China Resources Cement is Southern China including Guangdong, Guangxi, Fujian, and Hainan. However, together with the slowing down fixed asset investment (FAI) of the State, we have seen the FAI growth of the above regions except Hainan has remained stagnant since 2H09. We think as the economic highlights in the PRC have been changed from boosting FAI to domestic consumption, not including boosting FAI in the rural regions, growth of FAI may grow steadily in the rest of the year.

In 2009, revenue breakdown of infrastructure, real estate development and rural development of China Resources Cement was 60%, 20% and 20%, respectively. But in light of the central government's No. 1 document that the government would support house construction in rural areas as an important measure to stimulate domestic consumption, the company will re-adjust the weighting to 50%, 20% and 30%, respectively. However, while Southern China has been widely developed, we think the above policy will not much benefit China Resources Cement.

Coal Price to Drive Cement ASP

The average selling price (ASP) of cement, clinker and concrete in 2009 were HK$ 272.9 per ton, HK$ 211.3 per ton and HK$ 291.1 per meter cube, respectively, representing decreases of 3.5%, 14.3% and 5.7% respectively. The change in average price of the above products primarily reflected the reduced coal price in 2009 as offset by the price increases due to freight cost increases arising from the exceptionally low water level in the Xijiang River that were passed on to the customers in 4Q09. The decrease in ASP of concrete in 2009 was due to the general decrease in the cement prices.

However, coal price is expected to rise in 2010 that the ASP of coal purchased in 2009 was HK$ 587 per ton which has been lifted to HK$ 620-630 per ton in 1M-2M 2010. In addition, coal price will be supported by the cold weather in the Northern region, drought at Southern China and the closure of small coal mines in Shanxi province. Higher coal price can drive cement ASP as a result.

Peers Comparison

Valuation

We recommend “Hold” for China Resources Cement, considering the slowing down FAI in coming future and not surprising 09 financial results. Compared with the peers, industry average is 13.4x times 2010E earnings. With 15x 2010E P/E, this implies 12-month target price of HK$ 3.98.

Risk

Downside potential risks: i) Coal price plunged at a faster rate than expected in 2H this year.ii) Far slower growth rate of FAI in 2010.

Upside potential risks:i) The property market in Southern China performs better than expected.

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