China Cement Weekly:Cement Stocks Better than Steel Stocks If Market Sentiment Continues to Improve;Coal Prices Remain Stable So Far

　　Recovery in cement prices continued last week. The average cement price (nationwide) recovered 0.69% week-on-week to RMB255.33/tonne last week. Cement prices in parts of Jilin and Guangdong were up RMB15-50/tonne, while prices in parts of Anhui and Hunan declined up to RMB10-20/tonne. Market demand was still adversely affected by rainfall in most regions. Producers in northeast China tried to raise prices again after a failed attempt in March. South China saw a comparatively better situation on the back of stronger demand. East China continued to see a mild downward trend in prices owing to the off-peak season effect. Average inventory level (nationwide) climbed slightly to 68.9%.

　　Coal prices have stabilized for the last three months. The comprehensive average price index for Bohai-Rim Steam Coal (Q5500K) has stabilized at RMB389/tonne since early March. The index was only 6.0% lower on a year-on-year (YoY) basis.

　　Cement better than steel, if market sentiment continues to improve. Last week, the average PER of the HSI (Heng Seng Index) climbed from 9.7x to 10.16x because of stronger expectations of the launch of Shenzhen-Hong Kong Stock Connect. In the past few weeks, following the overall market, cement stocks were also under pressure. However, if market sentiment continues to improve thanks to increasing expectations of Shenzhen-Hong Kong Stock Connect, we believe it is time to revisit cement stocks. In fact, cement prices on a nationwide basis have still gone up in the past few weeks, although the uptrend in some regions was affected by the rainy season. Relatively speaking, we prefer BBMG [2009.HK, BUY] as it is not affected by the rainfall in east China. From a broader perspective, cement stocks are a better choice than steel stocks at the moment. Following the frenzy early this year, we have seen a sharp correction in rebar futures prices by >22% since end-April. In contrast, as we have discussed in the past, there is no cement futures market in China, so the price rebound is supported mainly by real demand and coordination among industry players.

　　Cement stocks under coverage up 5.0% on average. Market sentiment turned more positive as the HSI bounced 3.6% last week. Best performer CR Cement [1313.HK; HOLD] was up 11.9%. BBMG was the weakest among our coverage stocks, rising just 1.3%.