Stay positive: BBMG-H’s share price has been strong over the past month (+29% vsHSCEI’s +6% over the same period) but we remain positive and see further upside afterthe 1H16 positive profit warning and our recent NDR lunch with senior management.
Specifically, we lift our already above-consensus earnings further, tweak up our TPs (H by18% to HKD4.30 and A by 19% to CNY3.80) on higher earnings and target multiples. Wemaintain our Buy on BBMG-H shares and upgrade BBMG A shares to Hold.
Cement profitability stronger than earlier expected: BBMG’s cement businessturned profitable in May 2016, while Jidon (the cement company with which BBMGintends to merge subject to approvals, see our 13 July note), has also seen animprovement in earnings. Management expects momentum to continue especiallygiven the recovery in prices seen in June. Specifically, June cement GP/t reachedRMB40 which compares to 1H15a RMB21 GP/t. This price recovery reflects bothdemand and supply improvements. Management guided that if prices remain atcurrent levels for the rest of 2016, annualised GP/t should be c.RMB30-35, asubstantial increase over the RMB18 GP/t achieved in FY15A.
Consolidation seen as strategically positive: Investors’ feedback to the proposedconsolidation has been generally positive especially as, assuming successful completion;the combined BBMG/Jidong entity will control 59% clinker capacity and 79% clinkerproduction in Beijing-Tianjin-Hebei. The company has suggested scope for furthercooperation, acquisitions or capacity swaps with other major competitors in the regionwhich could further improve demand/supply dynamics.
Earnings/TP lifted, maintain Buy on BBMG-H as sector top pick: Given the above,we lift our forecasts. We increase our headline 2016e/17e earnings by 24%/17%. Weexpect BBMG’s 2016e headline NPAT to increase 45% in (or c.100% on an underlyingbasis) but note BBMG announced a 1H16 alert for 60-80% YoY profit increase onproperty development strength as well as the recent cement price gains. Our revisedFY16e/17e EPS are now 11%/33% above consensus. Our new BBMG-H TP implies 46%upside from last close. BBMG-H remains our top sector pick. We upgrade BBMG-A toHold on valuation. Key risks to our view are non-execution of the proposed Jidong mergeras well as price trends.