TIANSHAN CEMENT(000877)：NEW PLATFORM REFUELS GROWTH

　　Core views:
　　Tianshan Cement is a cement leader with the largest and most sophisticated value chain in the world and a nationwide business coverage. It has become the new platform of basic building materials for China National Building Material Company (CNBM). We expect the cement industry to see a bottoming out of demand and a rebalancing of supply-demand dynamics driven by the "carbon peak and carbon neutrality" initiative. Under such circumstances, Tianshan's growth will be driven by lowered costs and enhanced efficiency brought about by production line technical improvements and internal integration synergies, as well as the development of highly profitable aggregate business, and the secured shareholder returns through a higher dividend payout ratio and the performance compensation commitments from CNBM. We assign 7x 2023E PE to derive a target price of Rmb11 and initiate coverage with a "BUY" rating.
　　Abstract:
　　Company profile: The world's largest cement leader and the new platform of basic building materials for CNBM. Tianshan Cement is the world's largest cement leader with a sophisticated value chain and a nationwide business coverage. The revenue share of main segments are as follows: cement and clinkers contributing 67.4%, commercial concretes 26.1%, and aggregates 3.7%. Tianshan's controlling shareholder is CNBM, a Hong Kong-listco under China National Building Material Group (a large central SOE of building materials). After the restructuring of Zhonglian Cement, South Cement, Southwest Cement and Sinoma Cement and North Cement in 2021, the Company became the main operating entity of CNBM’s basic building materials. In 2022, Tianshan started the second phase of restructuring to promote the restructuring or trusteeship of cement and other relevant business assets of Ningxia Building Materials and Qilianshan, and eventually, the Company is likely to become the sole operating entity of CNBM’s basic building materials.
　　Cement industry: Demand bottomed out, and "carbon peak and carbon neutrality" drove the rebalance of supply-demand dynamics. We expect the cement demand to remain stable under infrastructure support next year, and the optimization of pandemic control measures and downstream financing policies may push demand to exceed expectations. On the supply side, the "carbon peak and carbon neutrality" initiative is likely to become an opportunity to drive sector supply contraction and efficiency recovery. The ongoing policies on energy consumption and other indicators have rolled out clear guidance for decapacity, the latest guidance on energy conservation and carbon reduction for the cement industry pointed out that the 24% of energy efficiency capacity not meeting the benchmark at the end of 2020 should be largely eliminated by 2025. Considering that the investment return cycle for small production lines is not short, small enterprises are more inclined to cut low-inefficiency capacity instead of technical reform. At the same time, many "carbon peak and carbon neutrality"-related policies are likely to improve, including green finance, integrating the cement industry into the carbon emission market, improving the layered tariff policy, implementing differentiated environmental control policies, etc., after the implementation of the above-mentioned measures will further widen the cost gap between standard capacity and inefficient capacity.
　　Company highlights: Cost reduction and growth efficiency + developing aggregates to drive growth, raise dividends + shareholder returns consolidated by major shareholders.
　　The first source of growth: Lowered costs and enhanced efficiency driven by the promotion of technological reform and synergies. Due to the joint restructuring-based development model, Tianshan's proportion of small production lines with weaker cost competitiveness is relatively high, bringing the headroom for further costs cuts to the fore compared with that of sector peers. There are two main ways to reduce costs: 1) Continuing to promote technical reform. We believe that technical reform is a more cost-effective investment than capacity replacement, or will be the main method to upgrade production lines going forward. Assuming that the Company transforms 10% of its production capacity each year, the clinker cost of a single project will drop by Rmb15 per tonne, which will bring down the clinker costs by Rmb1.5 per tonne; 2) exerting the synergy effect of integration. After completing the first phase of restructuring, the Company has reorganized into the framework of "10 cement regional companies + 3 commercial aggregate regional companies + 1 special cement regional company". This is conducive to reducing internal competition within the same region, giving more play to the advantages of scale and strengthening benchmarking management and resource sharing to warrant that companies in each region to focuses on their main business.
　　The second source of growth: The rapid development of highly profitable aggregate business. Tianshan's aggregate gross profit margin (GPM) reached 47.36% in 1H22, higher than 18.32% for cement clinkers and 13.63% for commercial concretes, and is still likely to maintain better profitability during the "14th Five-Year Plan" period (2021-25). On this basis, the Company's aggregate capacity is planned to increase from 190mt in 2021 to 545mt in 2025, with a capacity CAGR of 30% over 2021-2025. We estimate that the aggregates business is likely to post an annualized net profit growth rate of 7.5% during the period.
　　Raise dividends + performance compensation commitment by major shareholders secure shareholder returns. Tianshan plans to post a dividend payout ratio no less than 50% in the next three years, and the profit reduction caused by impairment will also help increase the absolute amount of dividends. At the same time, CNBM and the Company signed a "performance compensation commitment". We calculate that, Tianshan is likely to post a dividend yield of 4.5%/9.0%/6.9% for 2022E-2024E based on the stock price of Rmb9, securing shareholder returns.
　　Potential risks: Further significant decline in cement demand; poor implementation of policies for decapacity in the cement industry; deterioration in the competitive landscape of the cement industry; deterioration in the supply-demand pattern of the aggregate industry; the restructuring and integration of the Company's assets missing expectations.
　　Investment recommendation: Tianshan Cement is a cement leader with the largest and most sophisticated value chain in the world and a nationwide business coverage. It has become the new platform of basic building materials for CNBM. We expect the cement industry to see a bottoming out of demand and a rebalancing of supply-demand dynamics driven by the "carbon peak and carbon neutrality" initiative. Under such circumstances, Tianshan's growth will be driven by lowered costs and enhanced efficiency brought about by production line technical improvements and internal integration synergies, as well as the development of highly profitable aggregate business, and the secured shareholder returns through a higher dividend payout ratio and the performance compensation commitments from CNBM. We forecast its 2022E-24E attributable net profit (ANP) of Rmb7.078bn/14.088bn/10.696bn. Among them, the 2023E ANP forecast factors in the performance compensation commitment of CNBM. From a smooth point of view, we expect the CAGR of the Company's net profit to be 22.93% during 2022 and 2024. With its 2019 PE-TTM central tendency of 9.3x and its 2019 PB-IF central tendency of 1.3x as references, and considering the higher-than-ever demand pressures in the cement industry, we give certain discounting to the central tendency of historical valuations and assign 7x 2023E PE and 1.0x 2023E PB to derive a target price of Rmb11. We initiate coverage with a "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。