Beijing Building Materials Group (BBMG) is looking favourably to the rest of the year as an upturn in its Chinese cement sales and higher prices are forecast. However, expansion overseas is not yet seen as a priority despite the Chinese President, Xi Jinping's, desire for Chinese firms to expand across southeast Asia.

"Management remains positive on the demand pick-up in the region, given the support from the Beijing-Tianjin-Hebei (BTH) integration and overall improvement in the infrastructure and property construction sector, and for full year 2016, the company aims to achieve about 10 per cent sales volume growth," said UOB Kay Hian Equity Research Analyst Mr Johnson Hu.

BBMG is coming off a strong first quarter performance during which net profit was three per cent higher YoY at CNY151m (US$23.2m), up 3.01 per cent YoY.

China's "One Belt, One Road" initiative, proposed by the current president, focusses on connectivity and cooperation among nations primarily between the PRC and the rest of Eurasia, which consists of two main components - the land-based "Silk Road Economic Belt" (SREB) and the oceangoing "Maritime Silk Road" (MSR). The strategy underlines China's push to take a bigger role in global affairs, and its need to export the country's production capacity in areas of overproduction such as steel and cement.

Much has been said about the landmark mega-project, but it has yet to fully be unveiled. On the surface, construction campaigns seem like an ideal sales driver for cement plays like BBMG.

However, the Shanghai-based analyst said that, at least for now, BBMG wasn't looking to ride the road to revenue growth via the transcontinental plan. "BBMG has no overseas projects at present," Mr Hu told Asia Fund Space.

The latest cement price hike of CNY50/t should substantially lift BBMG's gross profit/t or restore it to a level similar to that in 2014, he said, which helped convince UOB Kay Hian to lift its earnings forecast for the Hong Kong listco by 10-22 per cent in 2016-17.

Meanwhile, the better cement price outlook should ease the market's concern over an earnings dilution at BBMG post its potential merger with Jidong Cement, he added. "BBMG's growth drivers are the cement market pickup, property sales, and acquisition of Jidong," Mr Hu told Asia Fund Space.

According to Digital Cement, BBMG and Jidong announced cement price hikes of CNY50-60/t effective 1 May 2016. "The market has been expecting cement price hikes in northern China in the wake of the price strength seen in the eastern and southern regions, and the cement price hikes by BBMG and Jidong turned out to be much stronger than expected.

"Cement price hikes will ease operational pressures in the cement segment," Mr Hu said. In 1Q16, BBMG achieved a cement and clinker ASP of CNY146/t (cement ASP at CNY159/t), which was CNY10/t below 4Q15's ASP.

Its cement business saw an earnings loss in 1Q16 with gross profit per tonne at CNY8/t and UOB KayKian expects the cement price hike to lift gross profit per tonne to above CNY30/t, which will be higher than the average of CNY18/t in 2015 and comparable to the average of CNY35/t in 2014.

Although BBMG's cement operations might reverse from a net loss post the cement price hike, it may only manage to barely break even, and there is a likelihood of a further price hike ahead, according to management.

Published under Cement News