Anhui Conch Cement: Cheap For Good Reasons (OTCMKTS:AHCHF)

Elevator Pitch

I rate Anhui Conch Cement Company Limited (OTCPK:AHCHF) [914:HK] as a Hold. The company is highlighted as a leading “cement producer in China” that boasts a “13% market share” by Fitch Ratings.

My previous August 6, 2021 write-up touched on both the bull and bear thesis for Anhui Conch Cement. The focus of this latest article is the stock’s valuations and the company’s Q4 2023 results preview.

Anhui Conch Cement’s valuations are inexpensive based on historical and peer comparisons. But the stock’s cheapness is warranted considering its weak financial outlook. The company’s earnings are projected to fall by a high-teens percentage in Q4 2023, and there is the possibility that its actual fourth quarter net profit might be even lower than what the market is anticipating. Taking into account these factors, I award a Hold rating to Anhui Conch Cement.

Readers can trade in the company’s shares on the Over-The-Counter market and the Hong Kong equity market. Anhui Conch Cement’s shares listed on the OTC market and the Hong Kong Stock Exchange boasted mean daily trading values of roughly $0.5 million and $12 million (source: S&P Capital IQ), respectively for the last 10 trading days. Investors can deal in Anhui Conch Cement’s Hong Kong-listed shares by utilizing the services of US stockbrokers with access to foreign markets such as Interactive Brokers.

Undemanding Valuations

The market currently values Anhui Conch Cement at a trailing P/B multiple of 0.46 times, a consensus next twelve months’ Enterprise Value-to-Revenue ratio of 0.61 times, and a consensus next twelve months’ normalized P/E metric of 6.1 times. These numbers are sourced from S&P Capital IQ.

It is reasonable to describe the stock’s valuations as undemanding.

Firstly, Anhui Conch Cement’s shares are cheap on an absolute basis. The stock is trading at less than half of its book value, and its Enterprise Value-to-Revenue multiple is below 1 times. A mid single digit P/E ratio isn’t exactly expensive as well.

Secondly, the company’s key valuation metrics are at a significant discount to their respective historical averages. As a reference, Anhui Conch Cement’s historical 10-year mean P/B, Enterprise Value-to-Revenue, and P/E multiples were much higher at 1.49 times, 1.41 times, and 8.5 times, respectively based on S&P Capital IQ data.

Thirdly, the stock is trading at relatively lower valuation ratios vis-a-vis its international peers as highlighted in the peer valuation comparison table presented below.

Peer Valuation Comparison For Anhui Conch Cement

Click to enlarge

Source: S&P Capital IQ

However, the market might be justified in assigning a hefty valuation discount to Anhui Conch Cement, taking into account the company’s financial prospects which I write about in the subsequent section.

Q4 2023 Results Preview

Anhui Conch Cement is expected to reveal its financial performance for the final quarter of the previous year on March 20, 2024.

The company’s previously announced Q3 2023 net income attributable to shareholders missed the analysts’ expectations by -13% according to S&P Capital IQ’s consensus data. Looking ahead, Anhui Conch Cement’s Q4 2023 financial results announcement in late March is unlikely to bring cheer to its investors. Specifically, the sell side is projecting that the company’s net profit attributable to shareholders will drop by -18% YoY to RMB2,491 million (source: S&P Capital IQ) in the fourth quarter of 2023.

There is a risk that Anhui Conch Cement’s Q4 2023 and FY 2023 financial performance could disappoint the market.

Mainland Chinese research firm TF Securities published a report (not publicly available) on February 2, 2024 titled “Building Materials Sector’s Performance Forecast Overview.” In this TF Securities’ report (translated using Google), it is indicated that six of the seven Mainland Chinese cement companies (which excludes Anhui Conch Cement) it tracked have announced preliminary bottom line estimates for Q4 2023 that are weaker on a QoQ basis as compared to Q3 2023. As a comparison, the market’s consensus forecasts sourced from S&P Capital IQ point to a narrowing of the YoY earnings contraction for Anhui Conch Cement from -26% for Q3 2023 to -18% in Q4 2023, or an estimated +25% QoQ bottom line expansion for the fourth quarter.

Separately, a February 6, 2024 Fitch Ratings research report indicated that China’s “cement output in 2023 declined by 4.5%.” In contrast, the market is still forecasting a positive +2.3% top line expansion in local currency or RMB terms for Anhui Conch Cement in FY 2023.

Looking beyond 2023, the company’s outlook also doesn’t seem particularly favorable, if one considers key metrics pertaining to China’s property market outlined below.

In the company’s 2023 interim report, Anhui Conch Cement outlined its expectations that “real estate investment will remain low” in 2H 2023 which will hurt the “demand of the cement market” in China. There is no indication that the Chinese real estate market is turning around anytime soon. A recent poll of economists conducted by Reuters as highlighted in a March 1, 2024 article suggested that China’s “new home prices would decline 0.9%” this year, and the Chinese residential property market will require “1-3 years” to “bottom out.” Separately, Fitch Ratings revised its new residential property sales growth forecast for China this year from flat to -5% contraction previously to a drop of between -5% and -10% with its latest March 1, 2024 report.

Closing Thoughts

Anhui Conch Cement’s depressed valuations are justified, implying that a Hold rating for the stock is fair. There is a risk of a Q4 2023 earnings miss for the stock considering cement industry data and its peers’ preliminary earnings estimates. Weak housing sales in the Chinese market have been a drag on cement demand and the company’s performance, but there aren’t signs of a recovery in China’s property sector yet.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.