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  • Cement price spike up amid the biggest supply curb since 2010 due to energy intensity limit
  • Expect cement GP improvement to outweigh the impact from sales volume cut
  • Raise FY22F earnings by 1%-25% on higher unit GP despite lower sales volume assumption
  • Top picks: Anhui Conch (914 HK) and China National Building Material (3323 HK); upgrade West Cement (2233 HK) to BUY
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Tighter market supply expected for 4Q21. We expect further strengthening in momentum for the P.O42.5 grade cement average price after the rebound started since late August. With NDRC’s policy in restricting cement production level for Sep-Dec, which magnitude is among the largest since 2010, market supply for 4Q would be reduced. Hence, we believe the potential shortage of clinker input arising due to lacking power supply to reduce cement output and in turn give it a better price outlook. 

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Cement GP rebound driving share price rerating. We foresee the limit of coal energy consumption could become a structural issue on the cement supply chain. This would not only affect cement production, but also coal consumption from 4Q onwards. In anticipation of a largely stable China cement market demand, we expect the situation to further accelerate cement GP rebound in 4Q (Conch’s 4Q GPM widened 15ppt to >41% back in 2010), which could be sustained even into the 1Q22 low season.   

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Top picks Conch and CNBM, upgrade to BUY for WCC. The China cement sector average is trading at only 0.9x FY21F and 0.8x FY22F P/B, which is undemanding compared to the average of 1.5x P/B during 2000-2020, lagging relative to other basic materials peers, and against expected ROE expansion. In anticipation of cement GP outlook improvement with solid CF support, we upgrade West China Cement to a BUY. Our preferred sector picks are Conch and CNBM, which offer better upside returns. We expect the cement price strength into 4Q would be the catalyst.