China Resources Cement's H1 profit far worse than expected

Heavy machinery loads a truck with materials for producing cement at a mainland factory. Cement price on the mainland market is expected to rise in the fourth quarter on better demand. Nelson Ching / Bloomberg

HK$635m gain only a quarter of Citigroup's bearish forecast

Cement prices on the mainland market are expected to rally in the fourth quarter on resumption of large infrastructure projects, helping to improve producers' profit margins, China Resources Cement Holdings Ltd said after reporting a sharp fall in earnings and profit margins for the first half, dragged down by weaker demand.

Despite turnover rising 9.8 percent to HK$11.03 billion ($1.42 billion) for the six months ended June 30, 2012, the company's net profit slumped 68.9 percent to HK$635.2 million over the same period due to sliding selling prices.

The company's HK$635.2 million profit gain was only a quarter of the 2.5 billion-estimates made by Citigroup earlier. Even though the securities group was bearish than most of its peers on the performance of China Resources Cement during the past six months, the company still surprised the market with an even worse outcome, according to the bank.

Average selling prices of cement - the key binding ingredient in ready-mix concrete widely used in infrastructure developments - slumped over 10.2 percent to HK$333.9 per metric ton in the first half of 2012 from HK$371.7 a year early, according to China Resources Cement, a unit of China Resources (Holdings) Co.

Gross margin of cement decreased 15.8 percentage points to mere 21.0 percent during the first half from 36.8 percent last year.

Net gearing ratio also climbed to 104.2 percent during the period from 91.3 percent in the first half of 2011. The company estimated that the ratio would reach 110 percent by the end of the year due to restrained cash flows - a far cry compared with the estimation of an improved 80 percent forecasted by the management team earlier this year.

China Resources Cement attributed the lackluster performance to a number of unfavorable factors including sluggish demand caused by weakened economy and poor weather conditions in the southern part of China, which led to accumulation of inventory as well as a series of price cuts.

Bidding on the resumed construction of railway networks with a reported investment of 580 billion yuan for 2012 as well as the ongoing affordable homes which targets completion of 5 million units on the mainland, cement prices are likely to rebound to HK$340 to HK$350 per metric ton in the fourth quarter this year, Zhou Longshan, chairman of China Resources Cement said during a media briefing in Hong Kong on Monday.

"Near-term cement prices pressure and earnings revision may still cloud the share performance and we suggest waiting for share weakness," according to a report prepared by CCB International Securities Group.

"We expect cement consumption to pick up driven by monetary loosening and on-going policy fine-tuning, while the lower coal prices would be an additional catalyst for earnings recovery," said the report.

But oversupply has become an issue haunting the whole mainland cement industry. A number of mainland cement producers have posted profit warnings in Hong Kong over the past months on the shrinking demand and decreasing prices.

Dongwu Cement International Ltd that listed in Hong Kong this June issued a profit warning in early August - 49 days after its initial public offering.

Anhui Conch Cement Co, China's biggest cement maker, also warned in June that its net profit would fall by more than 50 percent due to weak demand and falling product prices.

Other cement manufacturers on the mainland, including China National Materials Co, Shanshui Cement Group and Gansu Qilianshan Cement Group Co, have all posted similar profit alerts this year.

"Producers in some regions attempted to implement collaborative price hikes. Meanwhile, the industry remains in its slack season, with no obvious improvement in demand," said a Citic Securities report on Monday. "Given prices are already close to breakeven level and some producers are even at loss-making levels, so the downside in prices may be limited."

litao@chinadailyhk.com

(HK Edition 08/14/2012 page2)