www.research.hsbc.comDisclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.Play video withJohn Fraser-AndrewsEquitiesGlobal Building MaterialsSeptember 2019By: John Fraser-Andrews, Howard Lau, Brijesh Siya, the Global Building Materials Team and the ESG TeamGlobal CementPressure from EM glut and environment riskEM ex-China capacity utilisation set to slip to new record low in 2019, sustaining cement prices below cost inflation and restraining the ROIC recovery of EM exposed companiesOur ESG assessment identifies rising environment regulation costs as a significant risk, whereas social and governance profiles are benign and perpetuate industry longevityOur preferred picks are US infrastructure plays CRH and Buzzi among the global majors; CR Cement and Anhui Conch within our China coverage (all rated Buy); we have Reduce ratings for our coverage in Indonesia and most of IndiaS P O T L I G H T 1 Equities ● Global Building Materials September 2019 Limited return on invested capital recovery Our demand and new capacity forecasts update from our global network of six cement analysts point to EM ex China capacity utilisation remaining supressed at either side of the 60% level through to 2021. We expect this to keep cement price growth in EM below cost inflation, reinforced by ample viability for cement exports in many countries. Consequently, we are forecasting limited ROIC gains for most EM exposed companies, with few companies earning a significant premium to our cost of capital estimates. Chinese cement plant equipment suppliers continue to look overseas for growth prospects and they have, since 2012, reduced greenfield plant construction costs and therefore barriers to entry for new entrants in EM. Chinese cement producers are potentially becoming a more significant competitive threat overseas. Our ESG analysis identifies environment regulation costs as a significant risk We have assessed and benchmarked the Environment, Social, Governance (ESG) profiles of the 25 cement companies under our coverage, including a proprietary model that estimates additional production costs from the transition to phase 4 of the European carbon Emissions Trading System (EU ETS). We expect the social contributions from cement producers to sustain the companies’ longevity, which we find to be enhanced by their ownership profiles, within our governance assessment. Value in the US infrastructure plays and China Our preferred picks are the US infrastructure plays amongst the global majors, CRH (Buy, TP EUR36 from EUR35) and Buzzi (Buy, TP EUR24 from EUR25) and Anhui Conch (Buy, TP RMB52) and CR Cement (Buy, TP HKD9.2) within our China coverage, whose earnings we expect to be more resilient than implied by the low EV/EBITDA multiples. We have Red...
