Monday, November 30, 2020
 
Columnist
Martin Hennecke
 
ALLIED CEMENT
HKEx Stock Code : 01312 
 
Corporate Profile
The Group is a quality-focused clinker and cement company with operations in Shandong Province and Shanghai in the PRC.

Business Review - For the year ended December 31, 2012

The Group is engaged principally in the manufacture and sales of cement, clinker and slag, trading of cement and provision of technical services with operations in Shandong province and Shanghai in the PRC.

The Group's cement and clinker sales amounted to 2,405,000 tons (2011: 2,017,000 tons) for the year ended 31st December, 2012, representing an increase by 19.2% over last year. The overall market demand of cement slowed down as the Chinese government temporarily suspended promoting the infrastructure projects as one of the austerity measures and the stringent regulatory control on real estate to cool down the irrational rise in housing prices.

In the first half of 2012, the growth of cement production in China was less than 6%. The cement industry appeared to struggle in demand amid the stagflation environment as well as the irrational competition triggered in some regions, leading to a significant decline in the margin of the industry. Basically, the industry suffered from the pain of excessive capacity.

In the second half of 2012, China CPI eased from the highs gradually. The mainland China government revised its strategy to give priority to stabilising growth and granted approvals to large projects as well as resuming the construction of high-speed rails, which facilitated the recovery of the economy. Consequently, the overall performances of cement companies improved as the demand of cement rebounded in the second half of 2012 with prices recovering gradually.

1. Shanghai Allied Cement Co., Ltd. (“Shanghai SAC”)

In 2012, cement distributed by Shanghai SAC amounted to 1,001,000 tons (2011: 652,000 tons) with an increase of 53.5% from the previous year, generating a gross profit of HK$27.2 million (2011: HK$12.9 million), an increase of 110.9% over last year. During the year, Shanghai SAC continued to invest part of the net proceeds from the compensation of relocation into wealth management products managed by banks in accordance with the Group's treasury policies and investment guidelines. Through such treasury management, Shanghai SAC recorded fair value gains and interest income on financial assets of HK$28.7 million (2011: HK$18.1 million), representing an increase of 58.6% over last year.

In order to potentially enjoy the benefit from the country's policy where income from compensation of relocation can be deducted before tax, Shanghai SAC aimed to minimise its tax burden within the parameters of the country's policy by filing to Shanghai tax authorities documents related to the following transactions: purchase of cement vertical mills, raw material extruders and waste heat power generation equipment and machines for a total consideration RMB380 million; together with prior purchase of an office located in Pudong, Shanghai and expenses related to relocation and reassignment of personnel. Such potential tax benefit is subject to approval from the relevant tax authorities.

2. Shandong Allied Wangchao Cement Limited (“ Allied Wangchao”)

In 2012, Allied Wangchao achieved a production of clinker of 891,000 tons (2011: 882,000 tons), representing 1.0% increase from last year. Cement production reached 1,291,000 tons (2011: 1,138,000 tons), increasing by 13.4% over last year. The sales volume of cement increased from 1,146,000 tons to 1,291,000 tons, representing an increase of 12.7% over last year. This certainly reflected the market influence of Allied Wangchao in the northern Jiangsu and southern Shandong areas. Gross profit of Allied Wangchao amounted to HK$33.4 million (2011: HK$96.8 million), representing a decrease of 65.5% from last year.

Allied Wangchao enhanced the operations of its internal management in the following aspects in an attempt to leverage its improved efficiency and reduced consumption to mitigate the negative impact that declining cement prices brought on its economic performance:

A. established several technical improvement teams to analyse, study, provide and implement the various solutions to tackle important and difficult issues, lowered the manufacturing cost of clinker per ton and PO 42.5 cement per ton by 3.1% and 5.8% respectively as compared to last year;

B. implemented ongoing technical innovation to improve performance in order to survive in the fierce market competition; and

C. promoted cost saving principles as the Group's corporate culture.

During the year, Allied Wangchao had been assessed and awarded certificates of comprehensive utilisation of resources, as well as granted a total subsidy of around RMB5.9 million by a government agency.

3. Shandong Shanghai Allied Cement Co., Ltd. (“Shandong SAC”)

The slag production of Shandong SAC during the year reached 118,000 tons. Its products are mainly used as additives in cement grinding for Allied Wangchao.

4. The development of new cement production facilities at Bailonggang, Pudong, Shanghai (“Bailonggang Project”)

On 13th February, 2012, Shanghai SAC, a subsidiary of the Company, entered into the 《關於建設「白龍港項目」合作協議》(Bailonggang Project Construction Cooperation Agreement) (“Cooperation Agreement”) and the《關於設立合資公司(原則)協議》 (Principle Agreement for the Establishment of the joint venture company) (“JV Principle Agreement”) with 上海建築材料(集團)總公司 (Shanghai Building Material (Group) General Company) (“Shanghai Building Material”) for the purpose of setting up a joint venture company (“JV Company”) to operate and manage the Bailonggang Project. Pursuant to the agreements, the JV Company will be held as to 50% respectively by Shanghai SAC and Shanghai Building Material. The former will nominate the general manager and the later will nominate the chairman of the board which will be appointed by the board. The registered capital of the JV Company is RMB800 million, in which Shanghai SAC and Shanghai Building Material will inject RMB400 million (equivalent to approximately HK$493.8 million) respectively.

The Bailonggang Project progressed smoothly and passed the preliminary approval on the use of land conducted by Shanghai Municipal Bureau of Planning and Land Resources on 16th August, 2012. On 6th February, 2013, Shanghai Municipal Development and Reform Commission submitted to National Development and Reform Commission a formal document related to “上海建材資源綜合利用示範基地” (Demonstrative Bases for Comprehensive Utilisation of Resources in Shanghai). The Industrial Development Office of National Development and Reform Commission also officially accepted the relevant document and relevant government officers were supportive to it. We believe that this project will be highly valued by the government departments as it sets an example of successful transformation of cement manufacturing in big cities. The JV Company was tentatively named “上海萬華聯合生態材料股份有限公司” (Shanghai Wanhua Allied Eco Materials Co., Ltd.).

Planning to eliminate ball mills and adopt advanced technologies such as two-support kilns, 4th generation coolers and low-temperature waste heat power generation, the Bailonggang Project will reduce power consumption to a level significantly below those of traditional cement manufacturers. Moreover, the project is situated next to the biggest sewage treatment plant in Asia. It is expected that 530,000 tons of sludge with 80% moisture content, 500,000 tons of desulfurisation gypsum and other wastes amounting to 2.28 million tons will be detoxified every year. This will become an important part of the city's industrial chain, interdependent and complementing to the city.

The project preparation team has achieved excellent performance since its establishment in February 2012. The Group selected and assigned key members to participate in the preparatory work of the project. The principal activities for the next stage are land storage and purchase, improving technical proposals for the project, establishing the project company and assessing the dock construction project. The Group will work towards commencing construction of the project in the second half of 2013.

Business Outlook - For the year ended December 31, 2012

As urbanisation is still a focus of the country's Twelfth Five-year Plan, it is expected that the demand of cement will increase steadily, which will provide certain strategic opportunities for the cement industry. However, oversupply of cement still persists for a period of time and the market is in fierce competition. We believe that cement companies adopting tactics such as enhancing technological innovation and tightening control of cost and expenses will be able to maintain reasonable profitability. Companies which aim for larger scale but ignore internal improvements will find it difficult to survive, and especially companies with high gearing ratios and weak management team may be likely to suffer losses. In its professional philosophy, the Group will continue in keeping down cost together with technological innovation.

To generate and preserve its long-term value, the Group will continue to position itself as a quality-focused clinker and cement company focusing on producing and selling high quality products to differentiate itself from its competitors and to lower its production cost. The Group continues to further strengthen its customer base, market position and sales and marketing capabilities so as to achieve continued growth in its revenue and net profit. Meanwhile, the Bailonggang Project provides the Group with a solid foundation to tap into an advance business model in cement industry which offers a significant opportunity for future growth.

The Group will dedicate its efforts towards improving its results and at the same time committing to its core values which emphasise accepting social responsibilities, satisfying the needs of clients, maximising shareholders' values and promoting employees' development.

Source: Allied Cement Hold (01312) Annual Results Announcement
Chairman N/A Issued Capital (shares) 660M
Par Value HKD 0.01 Market Capitalisation (HKD) 541M
 
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