2015 earnings to fall 90~95% YoY

Huaxin Cement preannounced its 2015e net profit would fall90~95% YoY to Rmb61mn~122mn, below our expectation andmarket consensus (-65~-75%). This implies net profit of-Rmb64mn~-Rmb2mn in 4Q15.

Trends to watch

Full-year sales largely flat; earnings dragged bydropping GP/t.

Earnings to remain under pressure due to continueddecline in cement price in 1Q16. We expect the cement priceto further drop before demand starts to rebound. Coal pricerecently rose Rmb15/t, putting 1Q16 earnings under pressure.The supply-side reform mainly focuses on coal and steelas the two sectors are big employers and bear heavy liabilities.Hence, reduction of cement capacity will rely on thesector itself.

Valuation and recommendation

Considering the lower-than-expected earnings in 4Q15 and ourpessimistic forecast for 2016, we cut 2015/16e earningsforecast by 66%/82% to Rmb100mn/70mn; give 2017eearnings forecast of Rmb500mn. Huaxin-A now trades at0.9x 2016e P/B, cut Huaxin-A TP by 23% to Rmb6.7 (1x2016e P/B or EV/t of Rmb350). Keep Huaxin-B TP of US$0.7(0.7x P/B). Maintain HOLD for both Huaxin-A andHuaxin-B.

Risks

Weak demand due to continued decline in real estateconstruction.