Mid/long-term Valuation Merit Set to Rise
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
In the wake of a recent share price surge, we see several factors that need to be checked in order to justify an increased valuation for the cement industry. We view the key check points as being: 1) whether a cement demand recovery becomes visible; and 2) the level of room for further share price growth. Ssangyong Cement, Sampyo Cement, and Asia Cement are all well situated to benefit from a cement demand recovery.
Interpretation of cement shortage news
According to media reports, end-March cement inventories stood at only 40% (51.0mn tons) of the appropriate inventory level (1.3mn tons) due to: 1) delayed construction work at several projects amidst a cold wave; and 2) lengthened maintenance periods for production facilities. In general, the storage period for cement tends to be short at around 1~2 months, and demand historically concentrates in March~June and September~November. For reference, the period over which production is disrupted due to the installation of an alternative fuel-based facilities is usually within 30 days.
Korea’s cement industry is capable of producing up to 65.0mn tons of cement annually (5.5mn tons/month on average). The average monthly demand in 2016 (the time of a housing construction boom) was 5.25mn tons, with the utilization rate clocking at over 90%. Cement demand this year is projected to total 48.0mn tons, with an average of around 4mn tons/month. Against this backdrop, the above-mentioned media reports on cement inventory shortage are interpreted to suggest the following: 1) housing construction starts are becoming larger in scale amid more favorable housing market conditions; and 2) the installation of alternative fuel-based facilities is increasing across the whole cement industry.
The number of days below -5℃ over the recent winter was 21 days, almost the highest number witnessed in the past 8 years (excluding 2018: 25 days of winter below -5℃). Meanwhile, the 12-month moving sum of new housing starts came in at 538,000 units in Jan 2021, returning near to the 2018 level. In our view, amidst a rise in new housing starts, construction has been progressing rapidly in order to make up for the delay caused by the cold weather during the recent winter. Meanwhile, seeking to strengthen ESG, the cement industry as a whole is upping investment in alternative fuel-based facilities.
Mid/long-term valuation merit set to rise
Based on 2021E earnings, the simple average P/E for Ssangyong Cement, Sampyo Cement, and Asia Cement stands at 13x. However, this figure further declines when looking at earnings forecasts for 2022 and 2023 (2022F: 9x; 2023F: 8x), during which time cement demand is expected to climb in earnest.
In estimating earnings for these three companies, we assume cement demand of 48.5mn tons for 2021, 50.0mn tons for 2022, and 52.0mn tons for 2023, forecasting that the cement price will rise 3% in 2H21 to W77,500/ton. Given the conservative nature of our demand and price assumptions, there appears a good chance that cement players’ actual earnings will come in better than our forecasts, and that their mid/long-term valuation merit will strengthen.