Anhui Conch Cement Expects Earnings Recovery in 2023

Narrow-moat Anhui Conch Cement’s 600585 52.4% year-on-year decline in 2022 net income to CNY 15.9 billion is in line with previous guidance. The decrease is primarily driven by weak demand due to coronavirus restrictions and a cooling real estate market in an environment of high energy costs. We lower our fair value estimate to HKD 45 per H share (CNY 40 per A share) from HKD 50 (CNY 46) to reflect a slower recovery in sales and weaker selling prices. We think the shares are undervalued, underpinned by an earnings recovery in 2023 on the back of China’s reopening, steady infrastructure investment, and a mild real estate recovery. At current prices, the H shares are trading at 0.6 times 2023 price/book and a decent yield of more than 5%.

Despite the weak 2022 earnings, we are surprised that Conch increased its dividend payout ratio to 49% from 38% in 2021. We view this positively as it indicates that Conch is focusing on rewarding its shareholders. Although Conch’s capital expenditure will remain high in the near term, we raise our explicit dividend payout ratio forecast to 40% from 35%. We believe there could be further upside if there are no major mergers and acquisitions.