China Ceramics has completed the expansion of its Hengda facility. The facility is now capable of producing 42 million square meters of ceramic tiles per year, up from 32 million square meters in the second quarter of 2011 and an increase from 28 million square meters as of year-end 2010. The Company expects that the new capacity at Hengda will ramp-up to full utilization in about three months. The new equipment at Hengda will include new kiln and advanced stone-breaking equipment that will make operations more efficient. China Ceramics' current total annual production capacity of ceramic tiles is now 52 million square meters, consisting of 42 million square meters from Hengda and 10 million square meters from Hengdali. After the completion of Phase II at Hengdali by the end of 2011, China Ceramics expects to have a total annual production capacity of approximately 72 million square meters of ceramic tiles. This is expected to be composed of 42 million square meters of total capacity from the Hengda facility and 30 million square meters of total capacity from the Hengdali facility.
The Company's backlog of orders for delivery in the third quarter of 2011 is approximately US$ 61.9 million, representing a year-over-year growth rate of 36.1% compared to the third quarter of 2010. The Company estimates that its sales volume of ceramic tiles in the third quarter of 2011 will be approximately 14.6 million square meters.
In order to enhance transparency, the Company recently posted its 2010 annual SAIC reports for its two subsidiaries, Jinjiang Hengda Ceramics Co., Ltd. and Jiangxi Hengdali Ceramic Materials Co., Ltd. Translated English copies of the Chinese SAIC reports have been uploaded to the website to make it investor accessible for non-Chinese speaking shareholders. "We value the importance of transparency and are committed to a high level of corporate governance. In light of the heightened scrutiny of China-based companies listed in the US capital markets, we seek to differentiate ourselves by providing financial information beyond our disclosure requirements. We hope that our continued operating performance and added transparency will convey our commitment to our shareholders and bolster confidence in the Company."
We will update our model after new capacity become operational. We maintain our BUY rating and $16.00 PT - Our $16.00 target is based on 6.6x our FY11 EPS estimate of $2.41, a discount to peers in the U.S and in China.
For FY11, we increased our revenue and EPS on slightly higher ASP and sales volume assumptions. For FY12, we increased our revenue estimate on higher ASPs but decreased our EPS to reflect lower a GM assumption due to increasing raw material costs.
We maintain our BUY rating and $16.00 PT - Our $16.00 target is based on 6.6x our FY11 EPS estimate of $2.41, a discount to peers in the U.S and in China.
We are initiating research coverage on China Ceramics Co., Ltd (CCCL) – one of the leading ceramic tiles manufacturers in China. CCCL is one of the three market leaders in the exterior ceramic tile industry. We believe the company is well-positioned to penetrate the market based on brand recognition, product quality, broad distribution network and R&D capability. More importantly, strong cash flow from operations and a customized production process create competitive advantages and support capacity expansion and robust growth going forward.
High growth of China's real estate market supports demand for ceramic tiles – While China's real estate market has experienced sustained high growth, the market is still under supplied, in our view. Market drivers include 1) continued urbanization; 2) steadily increasing personal income; 3) large government spending in the form of subsidies and low-income housing programs.
The government's stringent real estate policies unlikely to affect housing supply and the construction materials market - Statistics show a steady increase in property under construction, despite volatile real estate sales volume each year. In other words, while sales fluctuate sharply year over year, particularly for residential buildings, new construction projects are supported by inelastic housing demand.
Growth outlook - We believe CCCL's plan to double capacity by 2012 will drive revenue growth of more than 33% annually for the next three years. Capacity utilization should remain high during the expansion given the positive demand outlook for ceramic tiles. We anticipate a gradual margin improvement from increased sales of high margin rustic and ultra-thin products.
BUY rating and $16.00 PT - Our $16.00 target is based on 6.8x our FY11 EPS estimate of $2.36, a discount to peers in the U.S and in China. We believe the current valuation discount reflects investor concern created by the uncertainty of China's real estate development. However, as we discuss throughout the report, and based on CCCL's historical performance, we believe the company will have sustainable growth in the future, despite the housing price and transaction fluctuations. As such, we believe recent share weakness presents an attractive entry point for investors.