where is the hope for Asia Cement

The company swung into the red in the first quarter as weak demand from China’s struggling property market pushed cement prices to fresh lows 

Key Takeaways:

  • Asia Cement warned it lost nearly 130 million yuan in the first quarter, reversing a 40.7 million yuan profit in the year-ago period
  • The cement maker’s situation is unlikely to improve in the near-term as prices remain in the doldrums due to weak demand from the struggling property sector

By Lau Chi Hang

Asia Cement (China) Holdings Corp. (0743.HK) was rock solid back in 2019, pouring up a 3.15 billion yuan ($444 million) profit as it feasted on demand from China’s booming property market. But those glory days are quickly fading, and the leading cement maker has been sliding these past four years as a crumbling property market eroded its profit from 2.67 billion yuan in 2020 to just 106 million yuan last year.

Any lingering traces of the boom officially went out the window this year, after the company recently warned that it would report a loss of nearly 130 million yuan in the first quarter, reversing a profit of 40.7 million yuan a year earlier. With the main pillar of its business currently slumping after three decades of strong growth, there’s no immediate sign of when the company might return to the profit column.

Founded in the 1950s, Taiwan-funded Asia Cement decided to expand beyond its home base in 2000 to tap the Mainland Chinese market as its property boom was taking off. It formally registered as a cement maker under its current name in 2004 and made a Hong Kong IPO in 2008. The company currently has 15 production lines with annual capacity of 35 million tons.

Fierce competition amid falling demand 

The company said its slipping performance is a direct result of falling cement prices due to falling demand from China’s debt-ridden property developers. Fewer and fewer new projects are getting built as the sector slumps, and work on many existing ones has stalled due to lack of funds and weak demand from buyers. That’s pressuring companies throughout the building materials sector, including cement makers. 

According to the National Bureau of Statistics (NBS), fixed asset investment in China grew by 3% year-on-year in 2023, while infrastructure investment grew by 5.9%. But real estate development investment fell by 9.6%. Data compiled by the China Cement Association’s Digital Cement website shows that national cement production fell 0.7% last year to 2.02 billion tons, with the industry’s profits expected to tumble 55% year-on-year to about 32 billion yuan.

Slumping demand from developers is pushing cement makers to slash their prices to compete for remaining orders, a dire situation that Asia Cement detailed in its 2023 annual results. Companies are all competing to maintain their market share, even if that means losing money, in anticipation of the day when the property market finally bottoms out.

As companies battled for business, data from the Digital Cement website showed the national cement transaction price averaged 394 yuan per ton last year, down 15% from 2022, and representing the lowest level in six years.

Gloomy outlook

Now, the big question is when the property market will finally turn a corner. Sales figures published by Chinese developers so far this year don’t look too promising, with no signs of recovery yet. To the contrary, developers are still being crushed by huge debt loads, sending a growing number to the courts where creditors are trying to collect on that debt. That’s even pushing some developers into liquidation, with China Evergrande Group (3333.HK) finally succumbing to such a liquidation request in Hong Kong earlier this year. 

While the earlier liquidation requests came mostly from foreign creditors, even domestic banks have started losing their patience with developers. That shifting tide was reflected by CCB Asia’s application to liquidate Shimao Group (0813.HK) to collect HK$1.58 billion it was owed earlier this month. As developers fend off their creditors, it seems unrealistic to expect them to carry out more projects this year, meaning demand for cement will remain weak and prices won’t rebound anytime soon.

As demand continues to weaken, cement companies may have to reduce production significantly in the future – something many are probably reluctant to do. Such reductions could finally cause prices to stabilize but will sharply reduce companies’ sales volume and thus further undermine their revenue.

Companies may also be reluctant to reduce production because many want to use new capacity they have built up in recent years. Asia Cement estimates that new capacity will still be entering the market this year, leading to continued high inventory levels as cement prices continue to sink. Rival Anhui Conch Cement (0914.HK) previously said it expects cement prices to continue coming under pressure this year.

Another market concern is cement makers’ costs, especially for coal. Coal prices subsided to between 900 yuan and 1,200 yuan per ton last year, but still remain near all-time highs. The State Council, China’s cabinet, in February also passed a new regulation on coal mine safety, signaling tighter regulation that could push up coal prices and pressure cement makers.

More losses ahead

In a nutshell, the market doesn’t hold out high hopes for a rebound in cement prices this year. And even if the prices stabilize, sales will continue to be weak. That means cement makers are unlikely to turn around this year, and could quite likely continue losing money.

The grim outlook has undermined most companies’ stocks, giving them low price-to-earnings (P/E) ratios. Anhui Conch trades at just 7.8 times, while China Resources Building Materials (1313.HK) trades at 10.3 times and China National Building Material(3323.HK) is just 5.4 times. Asia Cement trades much higher at 24.5 times, though that’s probably more because its profit is rapidly drying up rather than due to any investor bullishness.

Asia Cement isn’t the only company to send off distress signals. China National Building Material also issued its own profit warning, saying it expects to report a massive 1.3 billion yuan loss for the first quarter. In such a volatile climate, simply remaining profitable could become a major accomplishment – hardly a major attraction for investors. That means investors are unlikely to flock to this group anytime soon, which will further pressure their stock prices.

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