BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 Cement Sector 28 April 2014

What’s new. We dialled into BBMG’s 1Q14 analyst call. The company Target Price HK$7.20 released unaudited 1Q14 results last Friday after the market close. EPS was 12m Rating Buy RMB5 fen and net profit was RMB214m in 1Q14 vs. a net loss of RMB61m in (24% upside) 1Q14. Revenue increased 20% y/y to RMB9,306m due to a substantial increase in booked revenue. Price Chart Cement. The company’s shipments grew 21% y/y in 1Q14, while production (HK$) growth was flat in the Beijing-Tianjin-Hebei (BTH) region. This suggests 7.50 further market-share expansion for BBMG amid capacity shutdowns. ASP 7.00 6.50 dipped 10% y/y to RMB212/ton, below expectations, due to keen competition. 6.00 1Q14 GP/ton improved by RMB12/ton y/y to RMB20/ton amid soft coal prices 5.50 but net profit per ton remained negative, though the loss narrowed y/y. ASP is 5.00 expected to increase in 2Q14 due to seasonal factors, but we expect a y/y 4.50 decrease following the worse-than-expected 1Q14 and still soft cement prices 4.00 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 in Northern China. Share price HSI rebased to sh. price Management indicated that capacity utilization is currently more than 90% and destocking started in April. It remains positive about demand prospects in Key Data Northern China due to demand from infrastructure construction for regional Price – HK$ 5.80 integration and industry restructuring in BTH. The central government 52W high/low – HK$ 7.20/4.02 announcing more detailed plans later this year would be a catalyst. Of note is Mkt cap (A+H share)– 33,888 (4,345) BBMG’s A/R collection period lengthening for its downstream concrete HK$m (US$m) business, which the company attributes to tighter liquidity. Further liquidity Shares in issue (H share)– 1,169.4 tightening could be a risk for demand growth. millions Free float (H share) – % 95.2 Property. Booked revenue followed up robust 59% y/y growth in 2H13 with a 3M avg. t/o– HK$m (US$m) 41.6 (5.4) 156% y/y surge to RMB4,179m in 1Q14, as project completions are reaching Major shareholder a peak. Property development gross margin dipped by 7 ppts y/y to 33% in BBMG Group 48% 1Q14 due to booking more social housing projects. Looking ahead we expect Sources: Bloomberg and Sun Hung Kai Financial continued strong property performance. Presale GFA rose 27% y/y to 1,648k sq m and presale revenue increased 43% y/y in FY13. These numbers should FY13 revenues: RMB44.8bn be reflected in FY14-FY15 earnings. BBMG’s current land bank totals 5.4m sq Property investment m and it expects to transfer a further 1m sq m of industrial land to this in the 4% Property next 12 months. The company currently has 7m sq m of industrial land in Cement development 29% Beijing. Given the central government’s commitment to relocating industry and 34% transferring industrial land to build social housing/self-use commodity housing, we believe BBMG’s lower-cost industrial land bank should help it remain competitive in the capital’s social housing market.

Modern RESEARCH INSTITUTIONAL builing Conclusion. We expect BBMG’s property business to continue performing materials strongly but revise down our cement ASP assumptions for FY14E/FY15E by 33% 5% to reflect the lower-than-expected cement ASP in 1Q14. Overall, we revise down our FY14E/FY15E EPS by 5% and 6% to RMB81.7 fen/RMB90.1 fen

respectively. We maintain our target multiple of 7X FY14E P/E for a new target Recent Research price of HK$7.20 (previously HK$7.60), implying 21% upside. BBMG trades at Solid FY13 Results, TP Raised to the low end of its historical valuation range at 5.6X FY14E P/E vs. its Hong HK$7.60 – 3 April 2014 Kong-listed cement peers’ 7.0X. We believe downside risk is limited at the TP Reduced to HK6.60; Maintain Buy – current valuation and maintain our Buy rating. Risks to our target price include 2 Sep. 2013 substantial downturns in cement demand and the property market. 1H13 Results First Glance – 22 Aug. 2013 Northern Exposure – 16 July 2013 (Initiation of Coverage)

Stuwart Chen (852) 3929-6164 [email protected]

Reports available at: http://www.shkresearch.com http://www.thomsonreuters.com http://www.capitaliq.com http://www.themarkets.com Bloomberg Code:

Sun Hung Kai Financial Institutional Research BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 28 April 2014

Figure 1: BBMG – earnings summary RMB m FY11 FY12 FY13 FY14E FY15E Revenue – RMB m 28,745 34,054 44,790 52,408 58,162 Gross margin – % 23.6 19.5 18.8 19.0 19.5 EBIT margin – % 19.0 14.3 11.2 11.1 11.3 EBITDA – RMB m 6,588 5,963 6,233 7,246 8,154 Net profit – RMB m 3,429 2,969 3,215 3,806 4,313 Net-profit growth – % 24.4 (13.4) 8.3 18.4 13.3 EPS – RMB fen 81.0 69.0 75.1 81.7 90.1 EPS growth – % 14.1 (14.8) 8.8 8.8 10.4 EV/EBITDA – X 9.9 10.9 10.4 9.0 8.0 P/E – X 5.7 6.7 6.1 5.6 5.1 Dividend yield – % 1.6 1.5 1.7 2.1 2.3 P/B – X 1.0 0.9 0.8 0.7 0.6 Weighted average shares – m 4,224 4,284 4,284 4,659 4,785 Sources: Bloomberg and Sun Hung Kai Financial

Figure 2: BBMG – forward P/E

(X) 16 14 12 10 8 6 4 2 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13 Jul13 Jan14 Forward P/E Mean +/- 1 SD

Sources: Bloomberg and Sun Hung Kai Financial

Figure 3: Forecast changes FY12 FY13 FY14E - Old FY14E - New FY15E -Old FY15E - New Revenue – RMB m 34,054 44,790 51,865 52,408 57,579 58,162 Gross margin – % 19.5 18.8 19.6 19.0 20.2 19.5 EBIT margin – % 14.3 11.2 11.8 11.1 12.1 11.3 Net profit – RMB m 2,965 3,215 4,021 3,806 4,617 4,313 Net-profit growth – % (13.5) 8.4 25.1 18.4 14.8 13.3 Diluted EPS – RMB fen 69.0 75.1 86.3 81.7 96.5 90.1 EPS growth – % (14.8) 8.8 15.0 8.8 11.8 10.4 Weighted avg. shares – m 4,284 4,284 4,659 4,659 4,785 4,785 Sources: Bloomberg and Sun Hung Kai Financial

Sun Hung Kai Financial Institutional Research 2 BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 28 April 2014

Figure 4: BBMG – forecast summary FY12 FY13 FY14E FY15E Cement Sales vol. (m tons) 35 39 43 46 ASP (RMB/ton) 247 234 231 236 GP/ton (RMB) 32 42 38 39 Revenue (RMB m) 11,470 13,122 14,452 15,667 Gross profit (RMB m) 1802.8 2,384 2,243 2,418 GPM (%) 15.7 18.2 15.5 15.4 Cement capacity (m tons) 46 46 50 50

Modern building materials Revenue (RMB m) 9,945 14,645 15,228 16,141 Gross profit (RMB m) 1,063 1,026 1,187 1,291 GPM (%) 10.7 7.0 7.8 8.0

Property investment GFA ('000 sq m) 760 760 760 760 Revenue (RMB m) 1,741 1,945 2,084 2,176 Gross profit (RMB m) 1,090 1,175 1,271 1,327 GPM (%) 62.6 60.4 61.0 61.0

Property development Booked GFA ('000 sq m) 836 1,177 1,600 1,840 Commodity 595 722 1,120 1,288 Affordable 241 454 480 552 Pre-sale GFA ('000 sq m) 973 1,648 1,500 1,650 Revenue (RMB m) 10,934 14,953 20,644 24,179 Gross profit (RMB m) 4,136 5,274 7,081 8,317 GPM (%) 37.8 35.3 34.3 34.4 Sources: Company reports and Sun Hung Kai Financial

Sun Hung Kai Financial Institutional Research 3 BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 28 April 2014

Figure 5: BBMG – valuation comparison FY1 EPS FY2 EPS FY1 FY2 FY2 EV/ Div. Price Market cap YTD Growth Growth P/E P/E EBITDA yield P/B Net D/E ROE (L/C) (US$ m) (%) (%) (%) (X) (X) (X) (%) (X) (%) (%) Cement – Hong Kong listed BBMG-H 2009.HK 5.80 4,370.8 (14.1) 17.6 12.7 5.7 5.1 7.5 1.4 0.8 72.7 13.1 CR Cement 1313.HK 5.80 4,887.1 11.3 25.8 12.6 9.0 8.0 6.8 1.8 1.5 69.5 14.5 Anhui Conch-H 914.HK 29.00 15,473.3 0.9 30.6 13.5 10.0 8.8 5.3 1.5 2.2 18.9 18.0 CNBM-H 3323.HK 7.48 5,208.7 (10.3) 17.8 12.0 4.6 4.1 8.1 2.7 0.9 332.3 17.5 SINOMA-H 1893.HK 1.49 686.4 (10.8) 31.5 15.8 7.0 6.1 5.9 1.7 0.4 99.6 3.5 West China 2233.HK 0.91 533.7 (20.9) 11.4 39.8 7.5 5.4 4.7 2.7 0.7 53.7 7.7 China Shanshui 691.HK 3.31 1,202.2 (0.6) 15.2 13.7 6.4 5.6 5.7 2.8 0.8 153.0 11.4 TCC 1136.HK 3.89 1,653.5 2.4 64.9 11.5 6.4 5.7 5.9 3.4 0.7 54.5 10.1 Asia Cement 743.HK 6.28 1,260.5 28.4 44.7 15.3 6.6 5.7 5.3 3.0 0.9 51.7 9.2 Average (1.5) 28.3 13.5 7.0 6.1 6.1 2.3 1.0 100.7 11.7 Cement – China listed BBMG-A 601992.CH 6.05 4,370.8 (11.0) 18.5 22.5 6.9 5.6 8.5 1.4 1.0 72.7 13.1 Anhui Conch-A 600585.CH 16.60 15,473.3 (2.1) 25.3 14.1 7.5 6.5 5.4 2.1 1.6 18.9 18.0 Tangshan Jidong 000401.CH 8.16 1,757.5 (3.8) 103.0 45.6 17.4 11.9 9.4 1.2 0.9 145.5 1.6 Huaxin 600801.CH 11.51 1,602.7 (5.2) 31.2 12.4 8.1 7.2 5.1 1.6 1.2 83.9 7.2 Jilin Yatai 600881.CH 3.75 1,135.7 (4.3) N/A N/A 9.6 N/A N/A 2.7 0.9 182.6 5.0 Gansu Qilianshan 600720.CH 6.26 776.7 (6.4) 27.3 23.7 8.8 7.1 N/A 0.8 1.2 85.8 11.8 Jiangxi Wannianqing 000789.CH 9.50 620.9 0.4 40.7 17.9 6.8 5.8 4.5 1.1 1.8 55.9 23.1 Average (4.6) 41.0 22.7 9.3 7.4 6.6 1.6 1.2 92.2 11.4 China property Agile 3383.HK 6.43 2,887.6 (22.6) 6.5 12.1 3.7 3.3 5.3 7.3 0.6 89.4 18.8 Evergrande 3333.HK 3.49 6,539.1 17.9 28.2 11.3 4.2 3.8 6.3 0.0 0.9 86.6 29.0 CC Land 1224.HK 1.50 500.7 (23.1) 33.2 61.0 4.0 2.5 4.1 3.0 0.3 31.6 3.7 Country Garden 2007.HK 3.16 7,522.8 (32.5) 25.0 24.1 4.5 3.6 5.0 6.6 1.1 81.2 20.9 Hopson 754.HK 7.62 2,205.4 (18.4) 14.4 21.5 5.5 4.6 8.4 0.0 0.3 61.6 8.1 R & F 2777.HK 10.66 4,430.5 (6.0) 17.3 17.8 4.3 3.6 5.6 7.2 0.9 130.6 26.1 Sino Ocean Land 3377.HK 4.12 3,870.3 (19.1) 27.3 9.7 6.2 5.6 6.6 5.6 0.6 53.9 10.4 China Vanke 000002.CH 7.94 14,464.2 (1.1) 21.9 19.5 4.6 3.9 4.5 5.2 1.1 44.7 21.5 Longfor 960.HK 10.42 7,313.2 (3.9) 20.6 17.7 6.2 5.2 5.9 2.7 1.2 58.6 24.0 CR Land 1109.HK 15.86 11,928.0 (17.5) 25.5 24.1 8.1 6.5 6.6 2.8 1.1 38.8 19.1 Greentown 3900.HK 8.09 2,252.4 (31.7) (1.4) 11.0 2.7 2.4 5.0 6.6 0.6 61.9 21.2 COLI 688.HK 19.12 20,154.3 (12.3) 18.4 18.7 6.7 5.6 5.6 2.5 1.4 28.2 23.4 Franshion 817.HK 2.50 2,954.1 (7.4) 28.3 24.8 6.1 4.9 6.0 3.8 0.8 44.9 14.6 KWG 1813.HK 4.29 1,600.8 (0.2) 24.7 22.7 3.5 2.8 5.7 8.4 0.6 64.4 16.6 Yuexiu 123.HK 1.52 1,827.6 (20.4) 24.7 27.3 6.6 5.2 8.9 5.4 0.5 75.5 12.4 Shimao 813.HK 16.00 7,166.2 (10.2) 38.7 22.3 5.0 4.1 5.6 4.9 1.1 62.3 19.0 Soho China 410.HK 6.03 4,104.4 (9.7) (43.1) (37.7) 11.9 19.2 9.0 5.1 0.7 18.0 21.7 Shui On Land 272.HK 2.08 2,146.7 (12.6) 69.9 25.5 11.9 9.5 16.5 2.9 0.4 76.6 6.3 Shenzhen Inv 604.HK 2.59 1,797.6 (11.3) 7.2 1,213.8 5.8 4.4 N/A 7.3 0.6 65.9 12.8 Average (12.7) 20.4 81.4 5.9 5.3 6.7 4.6 0.8 61.8 17.3 Sources: Bloomberg and Sun Hung Kai Financial

Sun Hung Kai Financial Institutional Research 4 BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 28 April 2014

Appendix: Financial statements and forecasts

Year end 31 Dec. P&L – RMB m FY11 FY12 FY13 FY14E FY15E

Revenues 28,745 34,054 44,790 52,408 58,162 Gross profit 6,785 6,654 8,404 9,948 11,318 EBIT 5,467 4,856 5,011 5,831 6,583 Finance costs (824) (973) (1,089) (1,172) (1,292) Tax (1,077) (804) (751) (902) (1,022) Net profit (shareholders) 3,429 2,965 3,215 3,806 4,313 Diluted EPS – RMB fen 81.0 69.0 75.1 81.7 90.1 DPS – RMB fen 7.2 7.1 7.8 9.5 10.5 Weighted avg. shares – m 4,224 4,284 4,284 4,659 4,785

B/S – RMB m FY11 FY12 FY13 FY14E FY15E

Cash & equivalents 7,918 5,906 8,596 8,384 8,635 Account receivables 3,491 3,992 5,006 5,765 6,398 Inventories 27,269 32,287 37,602 44,547 49,147 Net fixed assets 3,352 3,601 3,963 4,161 4,369 Total assets 76,915 83,162 98,840 106,637 116,402 Account payables 5,486 6,999 9,023 10,156 11,202 Short-term debt 11,287 12,388 16,517 16,117 19,117 Total current liabilities 39,299 43,463 52,060 53,369 58,979 Long-term debt 12,460 11,450 13,186 13,186 13,186 Total liabilities 55,199 58,137 68,814 70,325 76,223 Shareholders' equity 20,154 22,904 26,280 32,529 36,352 Minority Interests 1,562 2,121 3,745 3,784 3,827

Cash flow - RMB m FY11 FY12 FY13 FY14E FY15E

Net profit 3,593 3,150 3,243 3,844 4,356 Depn. & amortization 1,121 1,107 1,222 1,415 1,570 WC (5,315) 58 (5,758) (1,970) (2,376) Operating cash flow (1,136) 4,311 (560) 3,861 4,343 Capex (2,600) (3,528) (3,438) (4,193) (4,653) Investing cash flow (2,418) (3,394) (3,718) (4,193) (4,653) Financing cash flow 3,650 (2,484) 6,588 120 561 Net cash flow 96 (1,569) 2,309 (212) 251 Free cash flow (OCF – capex) (3,735) 783 (3,998) (332) (310)

Ratios - % FY11 FY12 FY13 FY14E FY15E

Revenue growth 24.3 18.5 31.5 17.0 11.0 Gross profit margin 23.6 19.5 18.8 19.0 19.5 EBIT margin 19.0 14.3 11.2 11.1 11.3 Effective tax rate 23.1 20.3 18.8 19.0 19.0 EPS growth 14.1 (14.8) 8.8 8.8 10.4 Net debt to equity 78.5 78.3 80.3 64.3 65.1 ROA 4.5 3.7 3.5 3.7 3.9 ROE 15.8 13.8 13.2 12.9 12.5 Cash conversion cycle – days 421 354 307 308 320 A/R turnover - days 54 40 37 38 38 A/P turnover - days 63 83 80 82 83 Inventory turnover - days 430 397 351 353 365 Sources: The Company and Sun Hung Kai Financial

Sun Hung Kai Financial Institutional Research 5 BBMG (2009.HK): Weaker Cement Prices, TP Cut to HK$7.20 28 April 2014

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Guide to Sun Hung Kai Financial stock ratings: . Buy – We expect return of 15% or better over the next 12 months. . Position Closed / Neutral – We expect return within –10% to 10% over the next 12 months. . Sell – We expect return of –10% or worse over the next 12 months. . Not Rated – No recommendation on the stock.

Institutional Equities Contacts

Address: 42/F, The Lee Gardens, 33 Hysan Avenue, Causeway Bay, Hong Kong Phone: Research (852) 3929 6162 Fax: (852) 3929 6153 Sales (852) 3920 2672 Web: http://www.shkfg.com

Research Stephen Yang, CFA [email protected] (852) 3929 6154 Nicholas Studholme-Wilson [email protected] (852) 3929 6156 Vik Chopra [email protected] (852) 3929 6165 Stuwart Chen [email protected] (852) 3929 6164 Jeremy Ng [email protected] (852) 3929 6160 Edward Chung [email protected] (852) 3929 6158 Doris Ma [email protected] (852) 3929 6162

Sales Richard Seaward [email protected] (852) 3920 2676 Andrew Scott [email protected] (852) 3920 2677 Charles Streeter [email protected] (852) 3920 2675 Katina Wong [email protected] (852) 3920 1705 Cherain Wong [email protected] (852) 3920 2671

Sun Hung Kai Financial Institutional Research 6