2018 A-SHARE BUILDING MATERIALS OUTLOOK：ST POSITIVE ON CYCLICALS; GROWTH STOCKS PREFERRED IN MID T.
Firstly, we think Nov 2017 to 1Q18 is a period when market expectations are likely tocatch up with the fundamentals of cyclical companies. We like Huaxin Cement （600801CH） and Anhui Conch （600585 CH）， and also suggest watching Wannianqing Cement（000789 CH）； we also highlight upcoming supply-side changes in the glass industry withleader Kibing Group （601636 CH） likely to offer opportunities.
Secondly, subsector leaders which posted a strong run in share price in 2017 should stilldemonstrate steady share price growth in 2018 if they have strong fundamentals andattractive valuations. We like Oriental Yuhong （002271 CH）， China Jushi （600176 CH），Beijing New Building Materials （000786 CH） and Sinoma Science & Technology （002080CH）。
Thirdly, we are positive on excess returns from quality growth stocks in 2018. Weparticularly like Pacific Quartz （603688 CH）， Monarch Sanitary Ware （002798 CH），SKSHU Paint （603737 CH）， TB New Decoration Material （002043 CH）， ChanghaiComposite Materials （300196 CH） and Triumph Science & technology （600552 CH）， whilealso highlighting Zaisheng Technology （603601 CH）。
Main theme of building materials sector in 2017: fundamentals stronger thanexpected Firstly, the prices of cement and glass exceeded expectations. The nationalaverage cement price had risen 63% from the beginning of 2016 to Dec 10, 2017, whilethe national average price of glass had risen 35%, both exceeding expectations.
Secondly, industry leaders such as Anhui Conch （600585 CH）， Kibing Group （601636CH）， Beijing New Building Materials （000786 CH）， Oriental Yuhong （002271 CH） andChina Jushi （600176 CH） posted much stronger-than-expected earnings growth in 9M17.
Short- and mid-term factors behind stronger-than-expected growth andimplications for 2018 In terms of short-term factors, with infrastructure demandremaining stable, the duration of property market strength and supply contractions beatexpectations. The most recent property market upcycle （29 months long from April 2015to Aug 2017） was the longest of the three since 2009. In addition, production cuts was akey factor at play in the sector last year with a focus on rotational production halts andenvironmental inspections.
In terms of mid-term factors, the sector showed strong resilience and industryconcentration was rising with leading players remaining strong. Since 2012, the buildingmaterials sector has been in a process of deleveraging and de-capacity with a decreasingdebt-to-asset ratio and LT debt to total asset ratio and decelerating growth in fixed assets+ projects under construction. The turnover in fixed assets + projects under construction（i.e. capacity utilization） in 3Q17 rose to the highest level since 2009. Based on conditionsin both asset-heavy and asset-light industries over the past few years, rising industryconsolidation and leading players’ consolidating strength tend to be two phenomena thatfortify each other.
We expect demand to decline moderately in 2018 with downside protection and improvements tobe seen on the supply side. On the demand side, the pace of decline in the property market iseasing, as policymakers remain focused on maintaining stable economic growth. On the supplyside, we believe strict environmental regulations will remain in place over the medium term （e.g.
rotational production halts, environmental inspections and reviews, a pollutant discharge permitsystem, an environmental tax）。 We expect the sector to maintain a tight supply-demand balance in2018.
Key sector changes worth watching in 2018
Large property companies to give rise to large building material companies As the domesticproperty industry becomes increasingly concentrated, centralized material procurement and thepopularization of home furnishing provided by developers will benefit large building materialcompanies with strong branding, a strategic focus on business cooperation with large developersand a competitive advantage in their respective fields.
Advanced manufacturing: from "import substitution" to "global leadership" Chinese glassfibre companies have now overtaken overseas leaders. The high-end quartz glass industry isshowing strong business conditions with Chinese players on track to achieve import substitution ata quickening pace.
CNBM-Sinoma merger nearing execution, business integration to produce synergy Asset andbusiness integration between the two groups will have several positive effects on their fundamentals,including business synergy, growth momentum brought by an effective internal competitionmechanism, and reduced costs/expense ratios thanks to improved capital structure and internalbusiness procedures.
Risks A significant drop in demand, raw material prices rising sharply, and supply-side policiesbeing relaxed.
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