Monday, May 19, 2008
Results Brief: Shui On Construction (983) - part ii
Part ii is about the relatively small but interesting cement business (45% owned JV with French Lafarge).
The JV is the largest cement producer in the central/southwest whose development has been the government's priority, irrespective of the earthquake. Cement is a very localized business and transportation costs make trans-province sales next to impossible. A favorable development is that the industry is undergoing consolidation because of excess competition (and expansion) in the past. Reinvestment has been kept low and old facilities which are environmentally unfriendly are plenty. It's good that government is enforcing stricter standard and so unfitted facilities are closing down quickly. This is reflected in the rise of the cement price across the nation.
It's worthy to note the JV's average selling price of cement last year was higher than Anhui Conch, the industry leader. So it seems the JV doesn't compete on price and there should be little doubt about quality of cement and the technological level of the plants. Capacity was 24m tons p.a. and the JV plans to double it to 50m tons by 2012. For comparison sales volume of Anhui Conch was 87m tons last year.
Profits are starting to climb. Before tax and impairment charges (on old facilities), SOC's share of earnings was $90 million last year and just $30 million the year before. Last year's share of turnover was $2b, the low profitability and high selling price seem to suggest there's much scope for improvement.
Like last time, it's very hard to put a value on a turnaround business. If I use the takeover of Chia Hsin Cement by TCC last year as a benchmark, then the value is 3x turnover (i.e. $6b in SOC's case). If I take the internal transfer price of SOC's guizhou cement plants to the Lagarge JV (which happened this year), then it's 1.5x book value (i.e. $4b for the all SOC's cement assets).
Both method give a very modest valuation if compared with Anhui Conch, which has 8x the capacity and generated 10x the turnover last year, had a market capitalization of $116 billion (@$74), more than 19x of even the higher value of $6b I just arrived. The Taiwanese Asia Cement which had similar turnover and size to SOC's stake in the Lafarge JV is currently listed at a capitalization of $7.2b. So it appears my ballpark figures should be close enough.
The combined valuation of SOC then becomes $10b (from part i) and $6b of cement assets minus $4.5b debt, which equals $11.5b. The current market capitalization (on enlarged basis after CB conversion) is only $7.6b, so it appears the current price is very safe and backed by ample value.
I must warn this share is not actively traded and there's great fluctuation in daily volume. And you may want to refer back to my analysis of SOC last year to complete the picture, for there were things that I won't repeat here.
DISCLOSURE: I hold 983 at time of writing.
The JV is the largest cement producer in the central/southwest whose development has been the government's priority, irrespective of the earthquake. Cement is a very localized business and transportation costs make trans-province sales next to impossible. A favorable development is that the industry is undergoing consolidation because of excess competition (and expansion) in the past. Reinvestment has been kept low and old facilities which are environmentally unfriendly are plenty. It's good that government is enforcing stricter standard and so unfitted facilities are closing down quickly. This is reflected in the rise of the cement price across the nation.
It's worthy to note the JV's average selling price of cement last year was higher than Anhui Conch, the industry leader. So it seems the JV doesn't compete on price and there should be little doubt about quality of cement and the technological level of the plants. Capacity was 24m tons p.a. and the JV plans to double it to 50m tons by 2012. For comparison sales volume of Anhui Conch was 87m tons last year.
Profits are starting to climb. Before tax and impairment charges (on old facilities), SOC's share of earnings was $90 million last year and just $30 million the year before. Last year's share of turnover was $2b, the low profitability and high selling price seem to suggest there's much scope for improvement.
Like last time, it's very hard to put a value on a turnaround business. If I use the takeover of Chia Hsin Cement by TCC last year as a benchmark, then the value is 3x turnover (i.e. $6b in SOC's case). If I take the internal transfer price of SOC's guizhou cement plants to the Lagarge JV (which happened this year), then it's 1.5x book value (i.e. $4b for the all SOC's cement assets).
Both method give a very modest valuation if compared with Anhui Conch, which has 8x the capacity and generated 10x the turnover last year, had a market capitalization of $116 billion (@$74), more than 19x of even the higher value of $6b I just arrived. The Taiwanese Asia Cement which had similar turnover and size to SOC's stake in the Lafarge JV is currently listed at a capitalization of $7.2b. So it appears my ballpark figures should be close enough.
The combined valuation of SOC then becomes $10b (from part i) and $6b of cement assets minus $4.5b debt, which equals $11.5b. The current market capitalization (on enlarged basis after CB conversion) is only $7.6b, so it appears the current price is very safe and backed by ample value.
I must warn this share is not actively traded and there's great fluctuation in daily volume. And you may want to refer back to my analysis of SOC last year to complete the picture, for there were things that I won't repeat here.
DISCLOSURE: I hold 983 at time of writing.
Subscribe to Posts [Atom]