HSBC lowers China Resources Cement target price

HSBC Global Research lowered its target price for China Resources Cement to HKD4.30 from HKD4.40 and maintained its "hold" rating.

CRC recently said that based on the preliminary assessment of the group’s unaudited consolidated management accounts for the nine months ended 30 September 2015, attributable profit during the period is expected to "significantly decrease" as compared with that of 9M14.

The decline is primarily attributable to lower selling prices of cement and clinker in China compared with the year before, as well as the depreciation of Renminbi against other currencies since the beginning of the third quarter in 2015, resulting in exchange loss generated from non-Renminbi denominated net borrowings.

HSBC said the company's 3Q average selling prices (ASPs) have been tracking below its estimates. This was mostly driven by a large decline in Guangxi ASPs due to heavy rainfall leading to price competition as cement companies tried to lower inventory levels.

Despite this short-term negative, HSBC thinks this is likely to be offset by stronger-than-expected cement demand in Guangdong in 4Q as the tender for cement for infrastructure projects has picked up. It forecasts blended cement ASP for CR Cement to reach CNY311/t by the end of the year (previously CNY337/t) vs. current ASP of CNY257/t.

HSBC estimates that CR Cement will post HKD692m of exchange loss in 2H15. This has resulted in an 18 per cent decline in its FY15 reported earnings estimates (no impact on adjusted earnings). Post the current profit warning it thinks that the exchange loss overhang for CR Cement has been removed. (HL)