Breaking Events

Building Materials
Anhui Conch Cement (914.HK/HK$23): HOLD
3Q08 Results Short of Expectation
Wei LUO, luowei@cicc.com.cn (SFC CE Ref: AIR591)
Xue GUAN, guanxue@cicc.com.cn
Tel: (8621) 5879 6226
October 22, 2008

Financial highlights and recent share performance

120 Conch Cement HSCEI Index
(Rmb mn) 2004A 2005A 2006A 2007A 2008E 2009E 2010E
100
Revenue 8,385 10,826 15,246 18,776 22,787 25,156 27,471
(+/-%) 47.2% 29.1% 40.8% 23.2% 21.4% 10.4% 9.2% 80

Gross profit 2,752 2,446 4,407 5,716 6,320 6,193 7,052 60

(+/-%) 17.2% -11.1% 80.2% 29.7% 10.6% -2.0% 13.9%

40
Net profit 1,009 407 1,428 2,494 3,154 2,888 3,160
20
(+/-%) 36.4% -59.7% 250.9% 74.7% 26.5% -8.4% 9.4%
EPS 0.57 0.23 0.81 1.41 1.79 1.64 1.79 0
10-07 12-07 02-08 04-08 06-08 08-08
(+/-%) -3.0% -59.7% 250.9% 74.7% 26.5% -8.4% 9.4%
H Share
P/E(X) 34.6 85.8 24.5 14.0 11.1 12.4 11.7
Bloomberg code 914.HK
P/B (X) 4.5 4.3 3.5 2.8 1.4 1.3 1.2
Share price HK$23
EV/EBITDA (X) 12.1 17.0 9.6 9.2 5.3 6.0 5.6 Target price HK$30
ROE(%) 18.5% 7.1% 20.2% 22.5% 12.3% 10.3% 10.2% Daily turnover (mn shs) 4.87
ROCE(%) 7.4% 2.5% 7.4% 9.5% 7.2% 6.1% 6.0% Market Cap (HK$ mn) 40,618
0.7% 0.4% 0.4% 0.0% 1.8% 0.8% 0.8% 52wk high/low HK$76.5/20.7
Yield (%)
Issued shares (mn) 1766
CFO/Share(Rmb) 1.14 1.21 2.33 1.70 4.36 3.39 5.07
Free float (mn) 959
P/CFO 17.4 16.3 8.5 11.6 4.5 5.8 3.9
Major shareholders (%) Conch Group(35.66%)
Source: company data, CICC Research

Event:
Anhui Conch Cement released its 3Q08 results: operating income Rmb6.478bn (up 40.3% YoY), net profits Rmb704mn (up
13.3% YoY), and EPS Rmb0.4 (up 0.5% YoY). Over 1~3Q08: operating income Rmb16.675bn (up 28.6% YoY), net profits
Rmb2.018bn (up 34.3% YoY), and EPS Rmb1.14 (up 19.1% YoY).

Our comments:
3Q08 results are 18% below expectations, mainly because gross margin was squeezed by unexpectedly slow cement price
growth and strong cost growth in 3Q. Coal prices remained high in the third quarter despite a decline since late September. The
company’s 3Q gross profit fell by Rmb6 YoY to only Rmb60/tonne, and its gross margin shrank 6.4ppt YoY to merely 24.5%.

Cement and clinker sales grew 22% YoY to 26.50mn tonnes in 3Q and 16% YoY (10mn tonnes) to 71.50mn tonnes in 1~3Q08.
The company is expected to launch 16 production lines in 2008, increasing its theoretical cement production capacity by
14.60mn tonnes. Ten of these lines with be in eastern China (Anhui and Jiangxi), four in central China (Hubei and Hunan), and
two in southern China (Guangxi).

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to buy
or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities of
companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC’s written permission.
 Breaking Events

Financial data improved significantly. The company repaid some debts after the successful follow-on offering. Its long-term
and short-term borrowing balances declined Rmb1.6bn and Rmb1.0bn from 1H08 levels, respectively. The debt/asset ratio fell
further to 39.8%, the net gearing ratio declined to 26%, and the interest coverage ratio reached 5.69x. Cash net inflow was
Rmb4.03bn in 1~3Q and the ending cash balance was Rmb5.44bn.

Gloomy 4Q08 results outlook: The sharp property investment slowdown has negatively affected the real estate industry,
putting downward pressure on demand in southern and eastern markets. We expect the company’s cement prices to fall in 4Q.
Although coal prices are expected to decline as well, we believe cement prices may fall faster than cost, eroding the company’s
4Q08 gross profit YoY.

Declining cement industry climate: Leading indicators suggest a sharp decline in 2009 property and industrial investment
growth. As a result, cement demand growth is expected to slow to 6% in 2008 and 4.8% in 2009. Cement prices and industry
profitability may decline in 2009 and the first half of the year may be the toughest period. However, the cement industry may
start to recover in 2H08 if the government introduces forceful supportive policies over the next nine months, real estate demand
recovers, property development investment growth stabilizes, and infrastructure spending rises.

Earnings forecast and HOLD rating maintained on H-share with target price of HK$30: As the 3Q bottom line is below
expectations, the company’s full-year earnings are quite likely to fall short of expectations as well. However, we believe it
offers long-term investment value since the company is an industry leader with the most competent management, the best cost
control, and strong risk resilience among peers. It can benefit from industry consolidation during the down-cycle. Although we
believe the cement industry’s fundamentals are unlikely to turn around in the next nine months, policy easing on the real estate
industry and infrastructure investment may shorten the industry down-cycle and provide a boost to the stock price. Investors
should keep an eye out for possible rebounds stimulated by policy developments.

Chart 1: Average cement prices in China

P.O42.5 P.O32.5
380

340
(Rmb/tonne)

300

260

220
00- 00- 01- 01- 02- 02- 03- 03- 04- 04- 05- 05- 06- 06- 07- 07- 08- 08-
01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07

Source: company data, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to buy
or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities of
companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC’s written permission.
 Breaking Events

Chart 2: P/E & P/B bands

100 Anhui Conch Forw ard PE Band Anhui Conch Forw ard PB Band
90 100
90
80
80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
03-01 03-09 04-05 05-01 05-09 06-05 07-01 07-09 08-05 03-01 03-09 04-05 05-01 05-09 06-05 07-01 07-09 08-05
Px Last 9.7X 20X 30X 40X
Px Last 1X 3X 5X 7X
Source: Bloomberg, company data, CICC Research

Table 2: 3Q08 results

(Rmb mn) 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 QoQ YoY 1-3Q07 1-3Q08 YoY
Sales Volume (10,000 tonnes) 1820 2175 2167 2400 2057 2443 2650 8.5% 9.5% 6162 7150 16.0%
ASP (Rmb/tonne) 199 218 213 220 224 228 244 7.0% 5.1% 210 233 10.8%
Unit Cost ( Rmb/tonne) 147 147 147 142 168 159 185 16.3% 2.5% 148 171 15.7%
Sales revenue 3,621 4,734 4,617 5,804 4,615 5,583 6,478 16.0% 27.5% 12,972 16,675 28.6%
Cost of goods sold (2,718) (3,194) (3,193) (3,821) (3,447) (3,881) (4,893) 26.1% 26.8% (9,104) (12,221) 34.2%
Gross profit 903 1,540 1,424 1,983 1,168 1,702 1,585 -6.9% 29.3% 3,866 4,455 15.2%
Gross margin (%) 24.9% 32.5% 30.8% 34.2% 25.3% 30.5% 24.5% -6.0% 1.5% 29.8% 26.7% -3.1%
Selling expenses (247) (332) (305) (335) (306) (328) (353) 7.5% 23.9% (884) (986) 11.6%
G&A expenses (125) (152) (186) (257) (175) (169) (203) 19.8% 40.0% (463) (547) 18.0%
Finance cost, net (142) (159) (142) (164) (223) (209) (175) -16.5% 57.0% (443) (607) 36.9%
Operating profit 366 868 752 1,227 435 981 820 -16.4% 18.9% 1,986 2,235 12.6%
Non-operating income,net 51 118 78 24 48 93 54 -41.9% -5.9% 248 194 -21.5%
Profit before income tax 417 980 830 1,258 483 1,073 873 -18.6% 15.8% 2,227 2,430 9.1%
Income tax (123) (255) (188) (215) (12) (179) (157) -12.3% -90.2% (566) (348) -38.6%
Minority interest (66) (65) (30) (58) (21) (31) (12) -60.4% -68.2% (152) (64) -57.7%
Net profit 226 668 622 984 449 864 704 -18.5% 98.5% 1,503 2,018 34.3%
Net profit margin (%) 6.2% 14.1% 13.5% 17.0% 9.7% 15.5% 10.9% -4.6% 55.7% 11.6% 12.1% 0.5%
EPS (Rmb) 0.144 0.38 0.40 0.63 0.25 0.49 0.40 -18.5% 76.0% 0.96 1.14 19.1%

Source: company data, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to buy
or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities of
companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC’s written permission.
 Breaking Events

Table 1: Valuations of comparables

Company name Trd ccy Share price P/E P/B EV/EBITDA ROE
2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E 2007A 2008E 2009E
Cement
A share
Anhui Conch CNY 18.39 11.5 10.3 11.2 2.9 1.3 1.2 8.7 5.0 5.7 25.4% 12.3% 10.3%
Tangshan Jidong Cement CNY 5.6 14.6 14.0 17.2 2.5 1.1 1.0 11.6 7.8 6.9 17.4% 7.6% 5.8%
Huaxin Cement CNY 9.89 13.8 9.3 12.9 2.4 1.0 0.9 7.5 7.5 9.7 17.5% 10.6% 7.0%
Qilianshan Cement CNY 4.39 311.8 26.5 12.6 2.0 1.1 1.0 9.4 7.4 7.8 0.6% 4.1% 7.9%
Tianshan Cement CNY 7.15 22.6 12.6 8.7 3.4 2.3 1.8 12.9 7.0 5.9 14.9% 18.3% 21.1%
Saima Industrial CNY 10 18.0 11.2 8.5 2.1 1.0 1.7 8.7 4.2 3.6 11.6% 8.5% 19.5%
A share Average 16.3 11.9 11.9 2.5 1.1 1.1 9.1 7.2 6.4 16.1% 9.6% 9.1%

H share
Anhui Conch HKD 23 13.6 11.1 12.4 3.4 1.4 1.3 9.2 5.3 6.0 25.4% 12.3% 10.3%
CNBM HKD 3.63 8.3 4.6 4.8 1.0 0.8 0.7 9.7 8.4 7.0 12.4% 17.1% 14.4%
Sinoma HKD 2.8 16.1 11.0 7.1 1.4 1.3 1.2 6.0 3.7 2.1 8.7% 12.0% 17.1%
H share Average 13.6 11.0 7.1 1.4 1.3 1.2 9.2 5.3 6.0 12.4% 12.3% 14.4%

Europe
Cemex SAB de CV USD 7.9 2.6 3.7 3.4 0.4 0.4 0.3 n.a n.a n.a 15.7% 9.3% 9.8%
Holcim CHF 68.4 6.9 7.7 7.7 1.0 0.9 0.8 5.0 5.7 5.6 14.0% 11.8% 11.1%
HeidelbergCement AG EUR 67.71 5.4 7.1 6.5 1.2 1.0 0.9 8.8 6.5 6.3 21.6% 14.0% 13.2%
Lafarge SA EUR 56.55 6.0 5.4 5.1 0.9 0.8 0.7 7.2 6.0 5.6 15.1% 14.4% 14.1%
Europe Average 5.7 6.2 5.8 0.9 0.8 0.8 7.2 6.0 5.6 15.4% 12.9% 12.1%

India
ACC Ltd INR 476 6.5 7.5 8.6 2.1 1.8 1.6 3.6 4.2 4.6 33.0% 24.2% 18.6%
Grasim Industries INR 1224.9 6.4 4.6 4.6 1.7 1.2 1.0 5.2 3.6 3.6 26.9% 26.9% 21.1%
India Cements INR 90.45 4.7 3.5 3.8 1.1 0.9 0.7 5.8 3.4 3.2 24.3% 26.1% 18.9%
Shree Cement INR 477 4.9 n.a 3.8 2.6 n.a 1.7 4.4 n.a 3.0 54.3% n.a 44.6%
Ultra Tech Cement INR 372.8 5.9 4.6 4.7 2.8 1.7 1.3 4.7 3.4 3.4 47.3% 37.2% 27.3%
Adelaide Brighton AUD 2.65 12.9 11.7 10.1 2.2 2.1 2.0 8.3 7.4 6.6 17.0% 17.8% 19.6%
India Average 6.2 4.6 4.6 2.2 1.7 1.4 5.0 3.6 3.5 29.9% 26.1% 20.4%

Asia & Pacific

Asia Cement TWD 22.3 6.0 6.3 6.4 0.9 0.9 0.8 37.0 53.4 48.7 15.2% 13.5% 12.6%
Taiwan Cement TWD 16.55 6.1 8.0 7.5 0.7 0.7 0.6 14.7 13.1 13.8 11.9% 8.1% 8.6%
Siam City Cement THB 133 8.8 9.4 8.6 1.9 1.9 1.9 5.5 6.1 5.7 22.3% 20.7% 21.9%
TPI Polene THB 2.62 2.4 84.5 2.7 0.1 0.1 0.1 2.8 2.7 2.5 4.5% 0.1% 3.4%
Indocement TP IDR 5550 23.2 14.2 11.0 3.0 2.5 2.1 10.9 7.9 6.5 13.0% 17.8% 19.3%
Semen Gresik IDR 2500 9.1 7.3 6.4 2.2 1.9 1.6 4.7 3.7 3.2 24.5% 25.9% 24.7%
Asia & Pacific Average 7.4 8.7 7.0 1.4 1.4 1.2 8.2 7.0 6.1 14.1% 15.7% 16.0%

Gypsum board &

diversified building
mals
Saint-Gobain EUR 29.05 5.1 5.4 5.7 0.7 0.7 0.6 4.3 4.5 4.5 14.3% 12.6% 11.2%
USG Corporation USD 20.66 18.6 n.a n.a 1.0 0.8 1.0 8.4 79.8 28.7 5.1% n.a n.a
Owens Comings USD 18.86 17.2 22.5 15.8 n.a n.a n.a 6.8 7.6 6.9 n.a n.a n.a
Boral Ltd AUD 5.59 11.1 14.2 14.2 1.1 1.1 1.1 6.4 7.1 7.0 10.3% 7.9% 7.9%
CSR Ltd AUD 2.17 8.2 10.8 11.7 1.8 1.4 1.4 6.9 6.8 6.1 21.8% 12.9% 12.1%
CRH EUR 15.52 6.0 6.4 7.1 1.0 1.0 0.9 5.2 5.4 5.7 17.4% 15.5% 12.9%
Average 9.6 10.8 11.7 1.0 1.0 1.0 6.6 6.9 6.5 14.3% 12.7% 11.6%

Fiber glass
Asahi Glass JPY 659 10.6 7.6 6.3 0.8 0.8 0.7 4.1 3.8 3.7 7.4% 10.0% 11.2%
Nitto Boseki JPY 151 8.2 6.5 9.3 0.5 0.5 0.5 3.2 3.0 3.5 6.2% 7.6% 5.2%
Saint-Gobain EUR 29.05 5.1 5.4 5.7 0.7 0.7 0.6 4.3 4.5 4.5 14.3% 12.6% 11.2%
Average 8.2 6.5 6.3 0.7 0.7 0.6 4.1 3.8 3.7 7.4% 10.0% 11.2%

Engineering services
China Sinoma Intl Engineeri CNY 46.05 30.4 19.1 12.9 7.9 6.3 4.7 4.9 3.5 1.8 25.8% 32.9% 36.0%
FLSmidth DKK 214.25 8.6 6.2 4.8 2.8 2.1 1.5 6.0 4.2 3.3 32.2% 33.2% 32.4%
Average 19.5 12.7 8.8 5.3 4.2 3.1 5.5 3.8 2.6 29.0% 33.0% 34.2%

Source: Bloomberg, CICC Research

This report is based on information available to the public. No representation is made that it is accurate or complete. This report is not an offer to buy or sell or a solicitation of an offer to buy
or sell the securities mentioned. China International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect transactions in securities of
companies mentioned herein and may also perform or seek to perform investment banking services for those companies. This report may also be made available in Hong Kong by China
International Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited. Copyright of this report belongs to CICC. Any form of
unauthorized distribution, reproduction, publication, release or quotation by any institution or individual is prohibited without CICC’s written permission.
Beijing
China International Capital Corporation Limited China International Capital Corporation Limited
28th Floor, China World Tower 2 Beijing Jianguomenwai Ave Securities Trading Branch
1 Jianguomenwai Avenue 1st Floor, Capital Tower
Beijing, 100004 6A Jianguomenwai Avenue
Beijing, 100022
Tel: (8610) 6505-1166
Fax: (8610) 6505-1156 Tel: (8610) 8567-9238
Fax: (8610) 8567-9169

Shanghai
China International Capital Corporation Limited China International Capital Corporation Limited
Shanghai Branch Shanghai Middle Huaihai Road Securities Trading Branch
32nd Floor, Azia Center B1-B2, Century Autobus Tower
1233 Lujiazui Ring Road 398 Middle Huaihai Road
Shanghai, 200120 Shanghai, 200020

Tel: (8621) 5879-6226 Tel: (8621) 6386-1195

Fax: (8621) 5879-7827 Fax: (8621) 6386-1196

Hong Kong
China International Capital Corporation China International Capital Corporation
(Hong Kong) Limited Hong Kong Securities Limited
29th Floor, One International Finance Centre 29th Floor, One International Finance Centre
1 Harbour View Street 1 Harbour View Street
Central Hong Kong Central Hong Kong

Tel: (852) 2872-2000 Tel: (852) 2872-2000

Fax: (852) 2872-2100 Fax: (852) 2872-2100

China International Capital Corporation
Hong Kong Asset Management Limited
29th Floor, One International Finance Centre
1 Harbour View Street
Central Hong Kong
Shenzhen
China International Capital Corporation Limited
Shenzhen Fuhua 1st Road Securities Trading Branch
107 & 201, Annex Bldg, Shenzhen Duty Free Commercial Tower
6 Fuhua 1st Road
Futian District, Shenzhen, 518048

Tel: (852) 2872-2000 Tel: (86755) 8832-2388

Fax: (852) 2872-2100 Fax: (86755) 8254-8243

This report is based on information available to the public. No representation is made that it is accurate or complete.
This report is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. China
International Capital Corporation Limited and others associated with it (CICC) may have positions in, and may effect
transactions in securities of companies mentioned herein and may also perform or seek to perform investment
banking services for those companies. This report may also be made available in Hong Kong by China International
Capital Corporation (Hong Kong) Limited and/or China International Capital Corporation Hong Kong Securities Limited.
Copyright of this report belongs to CICC. Any form of unauthorized distribution, reproduction, publication, release or
quotation by any institution or individual is prohibited without CICC's written permission.