1

BBMG Corporation [2009.HK]

Jidong Cement (000401.CH) announced that it expects its net loss for 9M2016 to be

RMB42m-48m, implying a huge turnaround of about RMB880m in net profit in Q3. This

should remove one of the major concerns about the restructuring, as Jidong Cement

reported a net loss in 2014 and 2015. If we assume the restructuring is completed and

there is a full-year’s contribution in 2017 from the combined cement business of BBMG

and Jidong, we may see nearly 20% upside to our 2017 EPS forecast, based on net prof-

it per tonne of RMB20 (similar to the level in September 2016). We maintain our BUY

rating and sum-of-the-parts target price of HK$3.80 (0.85x 2016E PBR and 11.3x 2016E

PER). We believe the recent share price correction caused by overall market weakness

offers a buying opportunity. We will revise our earnings forecasts once the restructuring

is completed.

Investment Highlights

Impressive turnaround of Jidong Cement. Jidong Cement reported a net loss of

RMB928m in 1H16 because of weak cement prices. However, based on its latest pre-announcement for 9M2016, its net loss will narrow to RMB42m-48m, which sug-gests a net profit of about RMB880m in Q3, thanks to the recovery in cement prices. We understand that Jidong Cement returned to the black in May 2016 and has kept improving. Gross profit per tonne (cement and clinker) in September was close to RMB60.

Investors’ concerns relieved. Given that Jidong Cement reported a net loss

(before minority interests) of RMB277m and RMB2,150m in 2014 and 2015, respec-tively, we understand some investors may have had concerns about the outlook of the combined cement business of BBMG and Jidong Cement after the restructuring. The strong turnaround of Jidong Cement’s performance in Q3 should mitigate the concerns.

Tightening control in north China to maintain decent profitability. In terms of

clinker production capacity and production volume, the combined cement business of BBMG and Jidong Cement has a market share of 58.9% and 79.3%, respectively, in the Beijing-Tianjin-Hebei region. Once the restructuring is completed, we under-stand that the Company will seek more acquisitions to increase its market share in the region to further enhance its pricing power. In addition, currently about 60% of cement grinding capacity (about 150m tonnes) in the Beijing-Tianjin-Hebei region does not own clinker capacity (i.e. raw materials). Going forward, the combined ce-ment business will not sell clinker to external parties, and it will also encourage other players with clinker production to follow suit, which will force more smaller players out of the market. (more on next page)

BUY

Close: HK$2.81 (Oct 13, 2016)

Target Price: HK$3.80 (+35%)

Price Performance

Market Cap US$6,151m

Shares Outstanding 10,677.7m

Auditor Ernst & Young

Free Float 48.26%

52W range HK$1.905-3.26

3M average daily T/O US$6.1m

Major Shareholder BBMG Group (44.93%)

Sources: Company, Bloomberg

Wong Chi Man—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

Livy Lyu—Research Assistant

(852) 3698 6393

livylyu@chinastock.com.hk

Sources: Company, CGIS Research

China Cement Sector

Turnaround of Jidong Cement Another Positive; Reiterate BUY

October 14, 2016

Y/E Dec 31 2013 2014 2015 2016E 2017E

Turnover (RMB m) 43,204 39,452 38,747 41,605 46,665

Recurring net profit (RMB m) 2,954 1,942 1,873 3,087 3,433

Net margin (%) 6.8 4.9 4.8 7.4 7.4

Recurring EPS (RMB) 0.34 0.20 0.18 0.29 0.32

% Change 38 (41) (14) 65 11

PER (x) 6.7 11.3 13.8 8.7 8.2

PBR (x) 0.91 0.76 0.65 0.66 0.62

Source: Bloomberg

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Establishment of six centres to strengthen the management of the cement operations. The Compa-

ny is going to set up six centres to centralize management, increase efficiency and improve cost control of

the combined cement business, including (i) administration and management; (ii) sales; (iii) procurement;

(iv) technology; (v) innovation and (vi) concrete.

Coal cost increase to be offset by savings in electricity costs and other areas. Spot coal prices have

risen more than 25% in the past two months. However, the Company believes most of the impact is offset

by (i) an ASP hike; (ii) savings through increasing direct power supply (about RMB2-2.5 cost reduction per

tonne); and (iii) other cost control measures, such as centralized procurement.

Potential to see nearly 20% EPS upside if the restructuring is executed smoothly. Based on the ce-

ment prices in the past few months, if we assume that if the market remains relatively stable in 2017, net

profit per tonne of >RMB20 for the combined cement business is achievable. The annual production vol-

ume of 110m tonnes (cement and clinker) implies net profit of RMB2.2bn for the combined cement busi-

ness. Given that BBMG will own an effective stake of 52.67% of the business after restructuring, attributa-

ble net profit will be RMB1,158m (or accretion of about RMB660m). This would increase our 2017E EPS

by 19.4%. Our earnings forecasts remain unchanged at the moment as the restructuring has not yet been

completed.

Recap of the restructuring: step 1. BBMG will inject RMB4.75bn cash into Jidong Development. In addi-

tion, BBMG will acquire 10% of the existing shares of Jidong Development for a consideration of

RMB475m. Therefore, BBMG will spend a total of RMB5.225bn to get 55% of the enlarged share capital of

Jidong Development; Tangshan SASAC will own the balance. After the restructuring, the major listed as-

sets of Jidong Development will be a 30% stake in Jidong Cement (000401.CH) and a 30% stake in Jidong

Equipment (000856.CH).

Recap of the restructuring: step 2. BBMG will inject its cement, concrete, new materials and environ-

mental protection business into Jidong Cement in exchange for 1,391m news shares of the latter at

RMB9.31 per share. Jidong Cement will also raise RMB3bn by issuing new shares at no less than

RMB9.31 per share. After the restructuring, BBMG will directly own a 45.41% stake and indirectly own an

effective stake of 7.26% in Jidong Cement.

Progress of the restructuring. Step 1 has been completed but step 2 is still pending approval from the

China Securities Regulatory Commission (CSRC). The Company aims to complete the restructuring in Q4.

3

Figure 1: Restructuring plan details

Source: CGIS Research

Source: CGIS Research

Figure 2: 2016 financial performance of Jidong Cement (000401.CH)

* Expected net earnings based on the Company's Q3 preannouncement

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Key financials BBMG (02009.HK)

Income Statement

(RMB'000, except for per share amount)

Year ended 31 Dec 1H 2H 1H 2H 1H (A) 2H 2013 2014 2015 2016E 2017E

Revenue 19,819,694 19,632,371 17,050,142 21,696,757 22,554,974 19,050,521 43,203,573 39,452,065 38,746,899 41,605,495 46,664,989

COGS (15,481,691) (15,791,129) (13,107,106) (17,418,935) (17,621,384) (14,693,021) (34,799,884) (31,272,820) (30,526,041) (32,314,405) (35,826,627)

Gross profit 4,338,003 3,841,241 3,943,036 4,277,822 4,933,589 4,357,500 8,403,690 8,179,244 8,220,858 9,291,089 10,838,361

Operating expenses (2,140,412) (2,267,761) (2,169,871) (2,350,098) (2,246,389) (2,190,810) (4,377,555) (4,408,173) (4,519,969) (4,437,199) (5,177,796)

Operating profit 2,197,591 1,573,481 1,773,165 1,927,724 2,687,200 2,166,690 4,026,135 3,771,071 3,700,889 4,853,890 5,660,565

Other income and expenses 296,382 415,257 213,541 454,720 182,002 333,384 662,209 711,639 668,260 515,386 444,061

EBIT 2,493,973 1,988,737 1,986,706 2,382,444 2,869,202 2,500,074 4,688,344 4,482,710 4,369,150 5,369,276 6,104,626

Net f inance costs (593,340) (616,097) (684,185) (651,361) (708,012) (644,743) (1,017,497) (1,209,437) (1,335,546) (1,352,755) (1,327,876)

Profits from JCEs and associates 1,781 (30,231) (12,637) (5,057) (11,768) (5,000) (34,334) (28,450) (17,694) (16,768) 4,000

Non-recurrent items 184,248 374,274 234,813 (68,068) 211,999 - 357,240 558,522 166,745 211,999 -

Income before tax 2,086,662 1,716,683 1,524,697 1,657,957 2,361,422 1,850,331 3,993,753 3,803,345 3,182,654 4,211,753 4,780,750

Income tax expense (569,862) (524,511) (503,095) (728,492) (760,138) (555,099) (750,566) (1,094,373) (1,231,587) (1,315,238) (1,382,156)

Minority interests (136,151) (150,099) 26,142 40,244 219,862 129,523 (27,974) (286,250) 66,386 349,385 33,986

Net income 1,380,649 1,042,073 1,047,743 969,710 1,821,146 1,424,755 3,215,213 2,422,722 2,017,453 3,245,901 3,432,580

Recurring net income 1,180,300 761,367 852,300 1,020,761 1,662,146 1,424,755 2,953,706 1,941,667 1,873,061 3,086,901 3,432,580

EPS (RMB) 0.144 0.109 0.109 0.091 0.171 0.133 0.375 0.253 0.189 0.304 0.321

Recurring EPS (RMB) 0.123 0.080 0.089 0.096 0.156 0.133 0.345 0.203 0.175 0.289 0.321

DPS (HK$) - 0.064 - 0.036 - 0.035 0.098 0.064 0.036 0.035 0.036

Depreciation and amortization 606,028 607,618 737,556 658,330 767,192 735,736 1,100,637 1,213,646 1,395,886 1,502,927 1,604,141

EBITDA 3,100,001 2,596,355 2,724,262 3,040,774 3,636,394 3,235,810 5,788,981 5,696,356 5,765,035 6,872,204 7,708,767

Cement and clinker ASP (RMB/tonne) 219 210 192 167 159 195 234 214 178 178 190

Cement and clinker vol. ('000 tonnes) 18,350 22,200 17,100 22,160 20,300 21,570 38,900 40,550 39,260 41,870 44,759

Cement and clinker gross profit (RMB/tonne) 35 31 21 15 15 47 42 33 18 32 40

Booked GFA ('000 sq.m) 782 715 398 865 728 472 1,177 1,497 1,263 1,200 1,400

Revenue Breakdown:#

Cement 5,790,500 6,931,500 5,144,100 5,684,600 5,096,300 6,015,866 13,122,000 12,722,000 10,828,700 11,112,166 12,110,926

Modern building materials 5,807,000 4,716,000 5,125,000 5,246,700 5,160,500 5,243,790 14,644,500 10,523,000 10,371,700 10,404,290 10,842,315

Property investment 1,103,700 1,088,700 1,264,000 1,428,400 1,408,300 1,560,125 1,945,000 2,192,400 2,692,400 2,968,425 3,067,800

Property development 7,937,900 7,598,700 6,493,900 10,427,500 11,726,600 7,233,400 14,953,000 15,536,600 16,921,400 18,960,000 23,100,000

Growth Rates:

Revenue 1% -17% -14% 11% 32% -12% 33% -9% -2% 7% 12%

EBIT 34% -30% -20% 20% 44% 5% 21% -4% -3% 23% 14%

EBITDA 30% -24% -12% 17% 33% 6% 19% -2% 1% 19% 12%

Core net income 12% -60% -28% 34% 95% 40% 38% -34% -4% 65% 11%

Recurring EPS 0% -64% -28% 20% 75% 40% 38% -41% -14% 65% 11%

Margins and Ratios:

Gross margin 21.9% 19.6% 23.1% 19.7% 21.9% 22.9% 19.5% 20.7% 21.2% 22.3% 23.2%

Net margin 6.6% 4.6% 4.8% 4.5% 6.4% 6.8% 6.9% 5.6% 4.7% 6.6% 7.3%

EBIT margin 11.1% 8.0% 10.4% 8.9% 11.9% 11.4% 9.3% 9.6% 9.6% 11.7% 12.1%

EBITDA margin 15.6% 13.2% 16.0% 14.0% 16.1% 17.0% 13.4% 14.4% 14.9% 16.5% 16.5%

Effective tax rate 27% 31% 33% 44% 32% 30% 19% 29% 39% 31% 29%

# Business tax included for f igures since 2012 due to change in disclosure format.

Sources: Company data, CGIS Research estimates

2015 2016E2014

Figure 4: Sum-of-the-parts valuation

RMB m Note

Cement and other building materials 15,537 0.8x PBR

Investment properties 18,249 30% valuation discount; 7% cap rate

Property development 31,976 30% valuation discount

Net debt (27,665)

Minority interests (3,750)

Equity value 34,348

Price Target (HK$) 3.80

Sources: CGIS Research

Figure 3: Market cement prices in north China (RMB/tonne)

Sources: Digital Cement, CGIS Research

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Key financials

Figure 5: PER band of BBMG

Source: CGIS Research Source: CGIS Research

Figure 6: PBR range of BBMG

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BBMG (02009.HK)

Balance Sheet Statement of Cash Flow

(RMB'000 , except for per share amount)

As at 31 Dec 2013 2014 2015 2016E 2017E Year ended 31 Dec 2013 2014 2015 2016E 2017E

Inventories 37,602,014 48,853,159 54,007,187 60,000,000 65,000,000 Profit before tax 3,993,753 3,803,345 3,182,654 4,211,753 4,780,750

Trade receivables 5,337,443 5,785,423 7,387,536 8,600,000 10,000,000 Depreciation & Amortization 1,169,655 1,291,784 1,395,886 1,502,927 1,604,141

Bills receivable 1,373,660 2,651,028 2,197,924 2,300,000 2,400,000 Change in w orking capital (3,791,176) (7,521,294) (8,477,792) (6,886,503) (6,200,000)

Others 7,248,598 6,749,024 7,373,104 7,424,233 7,449,233 Others / adjustments (1,932,069) (1,201,652) (846,452) 1,151,788 553,197

Bank balances and cash 8,595,510 10,980,172 18,369,881 13,335,385 12,735,215 Net operating cash f low (559,837) (3,627,817) (4,745,703) (20,035) 738,088

Total current assets 60,157,225 75,018,806 89,335,633 91,659,618 97,584,447

Capex (3,437,698) (3,473,151) (680,623) (2,000,000) (2,000,000)

PPE, net 18,633,539 18,856,086 19,390,359 20,030,474 20,226,333 Others (280,583) (127,391) 1,169,447 - -

Prepaid lease payments - - - - - Net investing cash f low (3,718,281) (3,600,542) 488,824 (2,000,000) (2,000,000)

Others 20,048,785 21,810,079 22,020,713 22,951,632 23,391,279

Total non-current assets 38,682,323 40,666,165 41,411,072 42,982,106 43,617,612 Change in debt 4,253,226 (1,970,954) 5,279,212 (2,689,871) 1,005,000

Dividends (668,263) (478,464) (320,333) (324,590) (343,258)

Total assets 98,839,549 115,684,971 130,746,704 134,641,724 141,202,060 Others 3,002,653 26,774,080 3,591,993 - -

Net f inancing cash f low 6,587,616 24,324,662 8,550,872 (3,014,461) 661,742

Trade payables 9,022,805 9,534,764 9,062,191 9,500,000 9,800,000

Other payables 3,154,941 3,696,216 3,626,299 3,700,000 3,800,000 Increase / Decrease in cash 2,689,412 2,384,661 7,389,709 (5,034,496) (600,170)

Bank and other borrow ings 13,516,500 11,635,636 16,805,996 17,000,000 18,000,000 Net cash/(debt) (21,106,510) (23,104,876) (23,324,716) (27,664,615) (29,264,785)

Others 26,365,726 34,647,039 35,692,087 39,198,268 41,303,268

Total current liabilities 52,059,971 59,513,656 65,186,574 69,398,268 72,903,268 Finance Ratios

Bank and other borrow ings 6,879,920 6,779,500 6,888,600 4,000,000 4,000,000 2013 2014 2015 2016E 2017E

Others 9,874,344 13,144,427 16,489,656 16,489,656 16,489,656 Valuation

Total non-current liabilities 16,754,264 19,923,927 23,378,256 20,489,656 20,489,656 PE(x) 6.7 11.3 13.8 8.7 8.2

EPS grow th (%) 38 41- 14- 65 11

Total liabilities 68,814,236 79,437,583 88,564,830 89,887,924 93,392,924 Yield (%) 4.4 2.9 1.6 1.4 1.4

PEG (x) 0.17 -0.28 -1.02 0.13 0.73

Shareholders' equity 26,280,140 31,107,268 38,082,973 41,004,284 44,093,606 EV/EBITDA (x) 9.2 9.4 9.2 7.8 6.9

Minority interests 3,745,173 5,140,120 4,098,901 3,749,516 3,715,530 PB(x) 0.91 0.76 0.65 0.66 0.62

Operational

Revenue grow th (%) 33 9- 2- 7 12

Gross margin (%) 19.5 20.7 21.2 22.3 23.2

Net profit margin (%) 6.9 5.6 4.7 6.6 7.3

Days receivables 41 51 62 70 73

Days payables 84 108 111 105 98

Days inventories 367 505 615 644 637

Current ratio (x) 1.2 1.3 1.4 1.3 1.3

Quick ratio (x) 0.3 0.3 0.4 0.3 0.3

Asset/Equity (x) 3.3 3.2 3.1 3.0 3.0

Net debt/equity (%) 70 64 55 62 61

EBITDA interest coverage (x) 5.7 4.7 4.3 5.1 5.8

Core ROE (%) 12.0 6.8 5.4 7.8 8.1

Sources: Company data, CGIS Research estimates

6

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China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :