华润水泥控股(01313)
　　ROE expected to stay low in 2016; downgrading to Hold, with TP of HKD3.2
　　CRC announced a profits warning for its 9M15 results on 6 October, and willreport 3Q15 results on 23 October. We expect 3Q15 results to be poor, turningfrom HKD 1.2bn NP in 3Q14 to a c.RMB 94m loss in 3Q15, on a steep drop inASPs and RMB devaluation. CRC is looking at ways to switch out its USD debt(HKD17b), but it will not be an overnight fix, so the RMB devaluation remainsthe biggest headwind to FY15-16 earnings. In CRC’s core region of SouthChina, new supply is still creeping up, so price competition could continue in2016. We expect ROE to stay low in 2016, prompting our downgrade.
　　RMB devaluation presents the biggest risk to earnings
　　Out of CRC’s HKD 19bn debt portfolio, 85% is denominated in USD/HKD, witha low borrowing rate of c.2.5%. CRC will not get the same economics in theRMB, with the one-year PBOC rate currently at 4.6%. CRC plans to increase itsRMB borrowings to 50% of its portfolio, but this would imply that interestexpenses will rise. Deutsche Bank’s economics team expects a 3%/5% RMBdevaluation in 2015/16, which we have partially modeled. A 1% RMB changewould lead to an 11%, or RMB221m, change to CRC’s FY16E earnings.
　　Supply-demand: price competition could worsen in 2016
　　South China (GD, GX, FJ and Hainan) accounts for c.85% of CRC’s earnings,and this region went through two very good years in 2013-14, with ASPs risingby 12%. This has attracted new entrants, with 32mt, or 12%, of new supply tobe rolled out in FY15-16. South China prices fell 20% in 2015, the sharpestdrop among any other region. Since M&A has stalled in the past few years,CRC’s market share has also remained stagnant. Unless demand picks upsignificantly in 2016, we see a limited recovery in utilisation rates and pricing.
　　Valuation and risks
　　CRC is a high-quality cement company with a strong management team andbalance sheet. However, in the absence of strong demand recovery, ROE couldstay low until there is more consolidation in its regions of Yunnan, Fujian, InnerMongolia and Shanxi, which are generating sub-optimal returns. We valueCRC based on 0.7x 2016E PB, which we regard as fair, as we estimate c.6%ROE in 2016. This results in a target price of HKD3.20/sh, implying 11x FY16EPER ? a 15% discount to our target PE for Conch. Risks: change in cementprices; demand recovery. Reverse are the downside risks.