By Clement Tan
HONG KONG, March 25 (Reuters) – China National Building Material Co Ltd’s shares fell on Monday after the company’s 2012 net core profit revealed the extent of its reliance on subsidies, raising fears that its aggressive acquisition strategy could prove unsustainable.
Declining demand has spurred consolidation in the Chinese cement sector, led by larger sector players such as CNBM. Three of its subsidiaries acquired 24 cement companies in 2012, according to the company’s 2012 earnings statement.
CNBM shares in Hong Kong were down 6.2 percent at 0400 GMT, nearing its December lows, even after the company reported a 30 percent decline in 2012 net profit on Friday which was better than some analysts had expected.
In contrast, Anhui Conch Cement Co Ltd rose 0.8 percent after posting a 45 percent decline in 2012 net profit, spurred by core net profit, which excluded subsidies, that was 14 times more than CNBM’s 2 yuan per ton, according to Nomura.
Core net profit excludes parts of revenue that are not directly associated with business operations.
“That suggests CNBM’s in-line 2012 result heavily relied on non-core, one-off government subsidies. It would have missed the market consensus estimates otherwise, in our view,” said Nomura analyst Yang Luo in a note on Monday.
Anhui Conch reported receiving 1.0 billion yuan ($160.97 million) in subsidies last year, against 4.3 billion yuan for CNBM.
“A bottom-up analysis of property and railway reveals cement demand growth should be lower than expected in 2013,” Luo added, suggesting that cement selling price upside will likely be due to supply constraints, rather than sales growth.
CNBM’s stock price has fallen more than 9 percent in Hong Kong this year, compared to the nearly 4 percent slide on the China Enterprises Index .HSCE of the leading Chinese listings in Hong Kong.
Shares tumbled across the cement sector earlier this month after mainland media reported that China’s top economic planning agency was investigating possible price collusion among leading players.
But JP Morgan analysts, in a note dated March 22, said CNBM was not concerned about the probe as industry consolidation had the backing of the government, which is worried about the negative effect of surplus production capacity on China’s economic growth. (Full Story) ($1 = 6.2122 Chinese yuan)
(Editing by Matt Miller and Stephen Coates)