Warning INDUSTRY OVERVIEW - Growth Enterprise … leading international corporations, ... Berger analysis INDUSTRY OVERVIEW ... CEMENT INDUSTRY Background Information

The information and statistics set forth in this section and elsewhere in this documenthave been derived from various official and government publications, publicly availablemarket research sources and from the market research report prepared by Roland Bergerwhich was commissioned by us (the ‘‘Roland Berger Report’’), unless otherwise indicated.We believe that the sources of such information are appropriate sources for such informationand we have taken reasonable care in extracting and reproducing such information. Wehave no reason to believe that such information is false or misleading in any material respector that any fact has been omitted that would render such information false or misleading inany material respect. The information has not been independently verified by our Companyor any of our directors, officers, representatives, affiliates or advisors and no representationis given as to its correctness, accuracy and completeness. Certain information and statisticsincluded, including those excerpted from official and government publications and sourcesin China, may not be consistent with other information and statistics compiled within oroutside China by third parties.

REPORT COMMISSIONED FROM ROLAND BERGER

We commissioned Roland Berger, an independent market research and consultingcompany, to conduct an analysis of, and to report on, the relevant industries in China in whichwe and our associates currently operate or plan to operate in, for the period from 2007 to 2017.The Roland Berger Report has been prepared independently of our influence. We paid RolandBerger a fee of RMB1.0 million, which we consider reflects the market rates. Founded in 1967,Roland Berger Strategy Consultants is one of the world’s leading strategy consultancies thatsupports leading international corporations, non-profit organizations and public institutions in abroad range of management issues. Roland Berger started its first project in China in 1983, andhas established five offices in the Greater China Area. Roland Berger’s industry coverage inChina includes general industry, construction industry and building material industry, amongothers.

The Roland Berger Report includes information on (i) the cement industry in China; (ii) theplastic profile industry in China; (iii) the residual heat power generation industry in China; (iv)the waste incineration industry in China; (v) the port logistics industry in China; and (vi) the newbuilding materials industry in China, as well as other industry and economic data, which havebeen quoted in this document. Roland Berger’s independent research was undertaken throughboth primary and secondary research obtained from various sources within these industries.Primary research involved in-depth interviews with leading industry participants and industryexperts. Secondary research involved reviewing company reports, independent research reportsand data based on Roland Berger’s own research database. Projected data was obtained fromhistorical data analysis derived from macroeconomic data as well as specific industry-relateddrivers.

Except as otherwise noted, all of the data and forecast in this section are derived from theRoland Berger Report.

Our Directors confirm that, after due inquiry, except as disclosed in ‘‘Summary — RecentDevelopments’’, that there is no adverse change in the market information since the issuance ofthe Roland Berger Report which may qualify, contradict or have an impact on the informationtherein or contained in this section.

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THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained herein is incomplete and subject tochange and it must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack.

MACROECONOMIC ENVIRONMENT IN CHINA

China’s economy has grown significantly, benefiting from the government’s economicreform and opening up policies. The real GDP increased at a CAGR of 9.3% between 2007 and2012 from RMB22.6 trillion to RMB35.3 trillion, surpassing Japan to become the second largesteconomy in the world in the second quarter of 2010. Based on the ‘‘Twelfth Five-Year Plan’’ andforecasts made by institutions such as the EIU, China’s GDP is projected to grow at 7% perannum in the next five years to reach RMB49.5 trillion by 2017.

Urbanization

The level of urbanization is one of the most commonly used indices to measure theeconomic development of a country. The level of urbanization in China has been improvingalong with its sustained economic growth. The urbanization rate rose from 44.9% in 2007 to52.6% in 2012. Based on the ‘‘Twelfth Five-Year Plan’’, the urbanization rate is expected toreach 55.0% at the end of 2017.

Investment in Energy Preservation and Environmental Protection

Total investment in environmental protection has been increasing as a percentage ofChina’s GDP during the past decade. As a percentage of GDP, investment in environmentalprotection increased from 1.0% in 2000 to 1.4% in 2011. Investment in environmental protectionduring the period from 2006 to 2011 grew at a CAGR of 20.8%, almost doubled the GDP’sCAGR in the same period. According to the prediction of Chinese Academy of Science based onthe economic growth and level of environmental protection, the total investment in the ten yearsfollowing 2012 will reach almost RMB10 trillion.

China’s Total Investment in Environmental Protection (Unit: RMB in Billion)

257339

449 453

665 659705 755 808

864 925989

1,059 1,1331,212

1,297

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

CAGR 7.0%

CAGR 20.8%

Source: National Bureau of Statistics, Institute of Policy and Management of Chinese Academy of Science, RolandBerger analysis

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CEMENT INDUSTRY

Background Information

Market Drivers

The regional consumption of cement, in general, is related to the economy. Therefore,China’s consumption depends on its GDP. In terms of downstream market segments, cementhas four major application segments, namely (1) infrastructure construction (e.g., highways,railways, airports and ports), (2) real estate (including residential and commercial), (3) newcountryside construction and urbanization, and (4) industrial facility construction. Specifically,the demand that is created by infrastructure construction accounts for almost 40% of the totaldemand.

In terms of government policies, in order to address the issues including the large-scaleoutdated capacity, excessive capacity, pollution and under-developed manufacturing of basematerial and related products, the ‘‘Twelfth Five-year Plan’’ proposed to abandon 250 milliontonnes of outdated capacity, to increase the industry concentration by 10%, to reduce theemission in order to meet the standards and to increase the consumption rate of products withthe labels over 42.5 to 50%.

Current Market Size

The cement consumption in China reached 2.16 billion tonnes in 2012. During the periodfrom 2001 to 2007, the cement consumption grew at a CAGR of 14%. Since 2008, affected bythe global economic crisis, the growth has slowed down. Motivated by the RMB4 trillion stimuluspackage, the CAGR climbed back up to 16% from 2008 to 2010. However, as the stimuluspackage ended and economic growth slowed down, the consumption grew at a lower CAGR of8% 2010 to 2012.

Domestic Cement Market Size (Unit: Billion tonnes) and Growth

0.0

0.5

1.0

1.5

2.0

2.5

0

5

10

15

20

0.6

7.8%

8.3%

0.7

9.1%

13.5%

0.8

10.0%

16.2%

0.9

10.1%

13.9%

1.0

11.0%

11.3%

1.2

12.7%

15.4%

1.3

12.6%

14.2%

1.4

2.2%

9.6%

1.6

9.2%

17.9%

1.9

10.4%

14.7%

2.0

9.3%

9.6%

2.2

6.3%

7.8%

2001 2002 2003

Market volume growth rate

2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP growth rate Market volume

Market Volume

(Billion tonnes)

Growth rate (%)

Source: National Bureau of Statistics, China Cement Association

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Since the cement products are not differentiated and are constrained by transportationcost, the market is segmented geographically. The domestic market consists of six segments,namely, northeast, North China, northwest, East China, middle south and southwest. Based onthe scale and stage of the segments, we classify them into 3 groups.

Domestic Regional Cement Market Size and Growth

Group Segment Province

Consumption(100 million

tonnes)CAGR

(2010–2012)Mature Market . . . . . East China Shandong, Shanghai,

Jiangsu, Zhejiang,Anhui, Jiangxi,Fujian

6.96 6.0%

middle south Henan, Hubei, Hunan,Guangdong,Guangxi, Hainan

5.75 9.9%

Emerging Market . . . southwest Chongqing, Guizhou,Sichuan, Yunnan,Tibet

3.27 17.7%

northwest Shaanxi, Ningxia,Gansu, Qinghai,Xinjiang

1.79 22.0%

Undeveloped Market. North China Beijing, Tianjin, Hebei,Shanxi, InnerMongolia

2.48 9.3%

northeast Heilongjiang, Liaoning,Jilin

1.36 7.2%

Source: China Cement Association, Industrial expert interviews

Market Size Forecast

Based on the analysis of the data of the past ten years, we found the cement consumptionof the country and of the segments is highly correlated with the GDP, urbanization rate, andconstruction and installation investment. Considering the expected growth rate of 7% for GDP,we expect the national cement consumption might reach 3.1 billion tonnes in 2017, with a 5-yearCAGR of 7.4%, of which Northeast China will consume 199 million tonnes, North China 367million tonnes, northwest 329 million tonnes, East China 877 million tonnes, middle south 803million tonnes and southwest 572 million tonnes.

Competition Analysis

In terms of sales, the market share of the top ten in the industry rose from 27% in 2011 to29% in 2012. Of the top ten enterprises, eight gained market share compared to 2011. Thoughthis industry has a tendency to be concentrated, it is currently still at a low concentration level.

In terms of profitability, among the top ten enterprises with highest sales of cement andclinker, Conch Cement has the highest gross margin that is 27.8% in 2012, while 20–25% forother nine, greater than that of medium and small enterprises. The average net profit margin ofthe top 10 is 8.4% in 2012. Due to its high gross margin and efficient cost control, ConchCement’s net profit margin is 14.1% in 2012, far ahead of other enterprises.

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Top 10 Cement Enterprises’ (in terms of sales of cement and clinker)Performance in 20122

Enterprise

CementProduction(milliontonnes)

ListedCorporationRevenue(billionRMB)

ListedCorporation

GrossMargin

ListedCorporationNet ProfitMargin

China National Building Materials. . . . . . . . 220.90 70.37 23.08% 6.37%Conch Cement . . . . . . . . . . . . . . . . . . . . 187.00 45.77 27.76% 14.12%Jidong Cement . . . . . . . . . . . . . . . . . . . . 69.93 14.61 23.66% 0.94%China Resources Cement . . . . . . . . . . . . . 64.64 20.41 24.07% 9.13%Shanshui Cement . . . . . . . . . . . . . . . . . . 56.86 12.96 25.44% 9.40%Huaxin Cement . . . . . . . . . . . . . . . . . . . . 42.35 12.52 24.40% 5.43%TCC International . . . . . . . . . . . . . . . . . . 40.20 9.20 18.62% 5.38%BBMG Corporation. . . . . . . . . . . . . . . . . . 35.40 34.05 24.46% 9.25%Tianrui Cement . . . . . . . . . . . . . . . . . . . . 29.70 6.13 25.01% 10.25%Asia Cement . . . . . . . . . . . . . . . . . . . . . . 23.88 6.68 16.79% 6.04%

Source: Wind, annual reports

Overseas Market

In 2012, the global cement consumption reached 3.86 billion tonnes, which grew from 2008at a CAGR of 8.1%. The growth is expected to further slow down. The global cementmanufacturing and consumption is driven by the emerging market, which includes China,Southeast Asia, Indonesia, Middle East and Africa. These areas have large cement productionwith a high growth rate and margin.

Domestic enterprises have started to expand its presence in the overseas market bymeans varying from cement and clinker export, labor export and manufacturing managementcontract, to complete value chains including technology innovation, engineering design,equipment manufacturing, installation, production test and maintenance, and operationmanagement. The export revenue of Conch Cement reached RMB1.39 billion in 2012.

The Main Trends in the Industry

Influenced by political guidance, profitability and changes in the supply-demandrelationship, the domestic cement market is facing a series of changes, which eventually aregoing to improve the profitability of the whole industry. These changes include (1) theelimination of outdated production capacity in the next two years, (2) suppressed growth ofproduction capacity, which is going to improve the supply-demand relationship, (3) industrialmerging that improves the market concentration, (4) vertical integration driven by the energypreservation and environmental protection, and market opportunities, which increase therevenue streams for the large enterprises and their control of the industry, (5) increasingpercentage of the high-grade cement products of high quality and (6) the expansion of domesticenterprises to the overseas market.

2 The four subsidiaries of SINOMA are counted as individual market players.

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Market Overview of Vertical Mill

Vertical mill is widely used in industries such as cement, electrical power, metallurgy,chemical and non-metallic mining. Foreign mill manufacturers possess mature technology andproduct advantages. Leveraging the successful experiences of foreign manufacturers, domesticmill manufacturers also began to upgrade their technology in recent years and gradually rolledout their proprietary or potential vertical mill products. Therefore, the products have gainedmarket acceptance among cement, electrical power and chemical industries in China.

In the modern cement production, the grinding process includes raw materials grinding,cement grinding, coal preparation and slag grinding. In general, the power consumption ingrinding process accounts for approximately 60–70% of the total power consumption. Therefore,the R&D emphases of cement grinding technology are to increase efficiency and lower powerconsumption.

Vertical mills advantages include efficient grinding and drying, good material adaptability,simple process, compact size and low operation and maintenance costs. As a result, vertical millis widely applied in raw material grinding process. In comparison with ball mill, vertical millfeatures advanced structure, grinding mechanism, systems, process layouts, automation controland energy efficiency. In particular, the use of thick bed grinding mechanism that enhancesgrinding efficiency, results in a 20% to 30% reduction in energy consumption. Hot winds of up to60–80 m/s shorten the time in which the materials remain in the vertical mills. Therefore, it iseasy to select qualified powder, and to fulfill automation control in ingredients allocation.Furthermore, the chemical composition and particle size distribution are very even.

Vertical mill is widely applied in foreign countries. In China, new dry cement productionlines with daily production of above 5,000 tonnes and slag grinding lines with annual productionabove 500,000 tonnes have already applied vertical mill, in which the energy efficiency andenvironment protection effects are very apparent, achieving great economic results. Vertical millis greatly promoted in cement industry and widely used in coal preparation, slag grinding,gypsum grinding and non-metallic mineral grinding, meanwhile it has good prospect in cementclinker and slag grinding areas.

Outside of China, vertical mill is the prime choice in grinding device in the cement industry,which almost completely substituted ball mill. The stage of development of vertical mill in Chinais 20–30 years behind developed countries. Therefore, vertical mill just started its application inthe cement industry in 2000, and all the vertical mill was imported, with main suppliers beingFLSmidth (Denmark), PFElF-FER (Germany), POLYIUS (Germany), LOESCHE(Germany) andUBE (Japan). This reliance on imported vertical mills has continued until 2007, with theintroduction of vertical mill produced in China. Since then, the development and marketacceptance of vertical mill has grown rapidly and the market share of imported vertical mills hasbeen surpassed. Some cement production lines established before 2007 applied ball mill due tothe high price of vertical mall, and these cement production lines account for approximately 30%of cement production lines in China. Domestically, vertical mill is generally applied in cementraw material production, while the cement vertical mill has not been widely applied, and this hasbecome an important technology upgrade application in the cement industry.

Market Size of Vertical Mill in China

Vertical mill is widely applied in the cement raw material system, with almost 100% usagein newly-established production lines. Due to the differences in coal in various regions, theapplication rate of coal mill, is lower at approximately around 30–40%. Currently, the penetration

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rate of cement vertical mill is still low, and the demand from upgrading the facilities using ballmill is expected to be robust. As a result, the market for vertical mills is expected to enjoy astrong growth potential.

In the past four years, benefited by the rapid development in infrastructure and real estateconstruction in China, the cement production capacity has increased accordingly, which result inincremental capacity that drives the growth in demand for vertical mills. For example, theincremental size of the vertical mill market is 107, 122, 125, 172 sets in years 2009, 2010, 2011and 2012, respectively. In the future, due to industry-wide consolidation and the elimination oflow-end production capacity, the incremental production capacity of cement will decrease andhence leading to a slower growth in demand for vertical mill. On the other hand, greateremphasis on energy preservation and, environmental protect lead to the substitute of verticalmill for ball mill in existing cement production lines. This would result in a new growth factor forvertical mill. It is anticipated that the incremental size for vertical mill will be 173, 162, 154, 145and 137 sets in years 2013, 2014, 2015, 2016 and 2017 respectively.

Vertical mill market size in China (sets)

107

122 125

172 173162

154145

137

2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Source: Roland Berger analysis

Prospect of Overseas Market

The sales of vertical mill produced in China to overseas markets are mainly throughcement production equipment procurement projects and complete grinding system projects.China has become an important export player in the cement equipment, and the overseas salesof vertical mill also increase rapidly. This growing trend is expected to continue as the growth ofthe complete set of cement equipment rises.

Some domestic vertical mills manufacturers are able to compete with their global peers,and foreign cement equipment suppliers have to choose vertical mill produced in China. Also, anumber of famous foreign cement production companies have switched to cost effective verticalmills produced in China.

In the coming years, the overall global cement industry is expected to grow atapproximately 3% annually, and the cement industry outlook remains good in certain developingcountries, Middle East/North Africa, Asia, Latin America and East Europe regions and someparts of Africa as well. As the cement production in these countries and regions rises,establishment of new production lines and upgrades of old production lines are expected todrive greater demand for vertical mill market.

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PLASTIC PROFILE INDUSTRY

Current Market Size

Plastic doors and windows have been the leading products of the market, accounting for35%-40% of the total demand of doors and windows. China produces the largest quantity ofplastic profiles in the world. During the ‘‘Eleventh Five-year Plan’’ period, the sales grew at aCAGR of 11.7%. In 2012, the production of plastic profile doors and windows by the enterprisesabove designated size was approximately 3 million tonnes, of which 128 tonnes did not meetnational standards. As the national product standards become mature and non-standardproducts are removed from the market, the advantages of big enterprises will become obvious.In 2012, the average price of plastic profile is RMB400/m2. According to the statistics, the grossmargin of plastic board/tube, and plastic profile was about 15% in the past five years and itdepended on the price of PVC that is the raw material.

Plastic profile doors and windows are extensively used in the cold area due to their strongheat preservation capability. The products almost cover the whole market from the low end tothe high end, and the markets on the town and country level are growing fast. The coloredplastic profile, which enjoy higher margin, boosts the profitability of the whole market.

Despite the slowdown of the current real estate market, urbanization, rural areadevelopment and government policies on energy preservation in construction activities aredriving the growth of the plastic profile market, primarily because plastic profile featuresexcellent cost-effectiveness, sound insulation, heat preservation and waterproof capability.


During the period from 2013 to 2017, the market is expected to grow at a CAGR of 8%. By2017, the plastic profile production of the enterprises above designated size will reachapproximately 4.25 million tonnes. However, the market faces a series of challenges, whichinclude uncertainty of the government regulation, PVC price variation, recognition in the high-end market and the substitution such as bridge-cut-off aluminum alloy.


To enter the plastic profile market, an enterprise needs strong financial capabilities torealize economy of scale. To succeed in the market, strong brand recognition, advancedtechnology and extensive network are all required. The market can be classified into threeechelons by production, namely, the first echelon consists of the enterprises with productioncapacity over 100,000 tonnes, the second echelon consists of the enterprises with production

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between 10,000 and 100,000 tonnes, and the third echelon consists of the enterprises withproduction lower than 10,000 tonnes. The market share breakdown is shown in the figure below.

2012 Market Size (Unit: Million tonnes) and Market Share Breakdown

29%

10%

10%8%

43%

1.72

1.28

3.00

Conch Profiles

Zhongcai Profiles

Jinpeng Profiles Shide Profiles

Other standard productNon-standard product

Standard product

Plastic profile

production

volume of

above-scale

companies

Source: Roland Berger analysis; Market research

The excessive production capacity has caused the intense competition in the market, whichin turn reduces the profit of the whole market. We expect PVC manufacturers and foreign plasticprofile companies will enter the market.

Compared to Zhongcai, Shide and Jinpeng, which are all in the first echelon, ConchProfiles is the leader in terms of size, product quality, branding, technology innovation andnetwork. Specifically, Conch Profiles has ranked no.1 by sales in the past nine years; it owns1,000 sets of molds and has the richest product variety in the industry worldwide; it was grantedwith a well-known trademark; it is a high-tech enterprise certified by the Ministry of Science andTechnology, and owns over 30 patents. It is also the first Chinese company in the industry toobtain CE certification and various other quality certifications. Conch Profiles has salesrepresentatives at over 200 sites.

RESIDUAL HEAT POWER GENERATION INDUSTRY

Market Drivers

The residual heat power generation industry is primarily driven by economic, technologicaland political factors.

Economic Factors. For a cement production line with a capacity of 5,000 tonnes/day, theassociated residual heat can generate up to 60,000 MW·h of power every year. After deductingthe operational cost, this residual heat power generation system can save power costs byRMB0.4 every KW·h. Thus, this process can save power generation costs by up to RMB24million per year. If the project investment is RMB70 million, the most optimistic payoff period canbe less than 3 years. Meanwhile, successful claim of CDM credit is able to increase the savingsand shorten the payback period. The cement production line with a design capacity of 1.6 million

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tonnes/year can reduce CO2 emission by 50,000 tonnes a year. This can increase the revenueby approximately RMB1.4 million to RMB3.6 million based on a carbon exchange price of 3–8Euros per tonne.

Technological Factors. Thanks to the development of residual heat power generationtechnology, residual heat power generation has been widely applied in cement industry, and hasbeen gradually implemented in steel, glass, chemical and other industries as well. China’sdomestic residual heat power generation technology is now on par with the world’s leadingtechnologies and has gained recognition from large foreign enterprises. The application ofdomestic technology has expanded not only in the target market for residual heat powergeneration industry, but also in the overseas market.

Political Factors. As the progresses in energy presevation and emission reduction havebecome mandatory indices to measure economic development, residual heat power generation,with its considerable economic and social benefits, has gained spotlight from the nationalstrategy level. According to the ‘‘Twelfth Five-Year Plan for Energy Saving and EnvironmentalProtection’’ and other related policies, China will continue its focus on projects that utilizeresidual heat power generation during the Twelfth Five-Year Plan. For example, pure low-temperature residual heat power generation and low-grade heat will be further promoted inmajor steel, nonferrous metal, and construction materials projects. The percentage of the use ofpure low-temperature residual heat power generation is targeted to increase from 55% to 70% incement industry, to more than 30% in glass industry, and to more than 50% in large andmedium-sized steel enterprises.

Current Market Size

Domestic cement enterprises began to adopt and employ residual heat power generation in2005, and the application of the technology has experienced a rapid growth during 2008 to 2010to reach RMB13.84 billion. In 2011 and 2012, the market size was fluctuating due to slowergrowth of investment in cement industry and overall fixed asset investment, as well as saturingof penetration residual heat power generation technology in the cement industry.

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Market Size of Residual Heat Power Generation Undertaken byChinese Enterprises (Unit: RMB in Billion)

6.38

6.78

0.260.14

10.29

11.03

12.22

13.84

0.85

9.45

11.97

1.28

0.70

8.55

12.27

1.87

1.26

0.59

0.430.31

0.350.42

0.54

CAGR 16.0%

2008 2009 2010 2011 2012

Glass

Steel

Cement-Overseas

Cement-Domestic

Source: Industrial research reports, Industrial expert interviews, Roland Berger analysis


As cement industry in China experiences slower growth and becomes saturated withresidual heat power generation technology, residual heat power generation within the cementindustry in China has been declining since 2010. However, in other industries, such as steel,chemical and metallurgical, residual heat power generation still has potential to develop sincethe industries are less mature. According to the ‘‘Twelfth Five-Year Plan’’, by the end of 2015,the new installed capacity of residual heat power generation in the seven industries (i.e., steel,cement, glass, synthetic ammonia, caustic soda, calcium carbide and sulphuric acid) isexpected to be 14,000 MW, with a total of RMB98 billion investment assuming a unit cost ofRMB7 million per MW. However, as the economic growth in China slows down and theinvestment incentive of the enterprises decreases, the investment in residual heat powergeneration is likely to be delayed by 3 to 4 years than expected, which means the target will notbe achieved until 2019.

Outside of China and excluding Japan and Taiwan, residual heat power generationtechnology has not been widely applied in cement plants. For example, there are only a handfulof cement plants that have adopted the residual heat power generation technology in India,which is one of the major cement producing countries. As a result, the growth potential forresidual heat power generation technology for cement industry outside of China is strong. Inparticular, among the approximate of 300 cement plants suitable for residual heat powergeneration in South and Southeast Asia, Middle East and Latin America (including Turkey, India,Pakistan, Vietnam, Saudi Arab and Brazil but excluding the said countries/areas i.e. China,Japan and Taiwan), only approximately 60 of these projects installed the residual heat powergeneration technology. As a result, the market for residual heat power generation solutions forcement companies outside of China is expected to grow at a CAGR of 27.9% from RMB1.9billion in 2012 to RMB6.5 billion in 2017.

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Within the same projection period as above, since residual heat is produced at many stepsalong the steel production process, the demand for residual heat power generation technologyfor converters, sintering machines, blast furnaces and dry coke quenching boilers is expected tobe strong. Based on the 12th Five Year Plan on industrial energy conservation, residual heatpower generation projects with an aggregate of 3,300 MW are expected to be installed orconstructed for the steel industry. Assuming a building cost of RMB7.0 million per MW, theseadditional residual heat power generation projects for steel industry in China are expected topresent a market of RMB23.0 billion. Meanwhile, according to Roland Berger, there areapproximately 260 glass production lines which are suitable for installing residual heat powergeneration solutions in China, of which approximately 50 have adopted residual heat powergeneration solutions. As a result, the potential market for residual heat power generationsolutions for glass industry in China is approximately 850 MW, or RMB6.0 billion assuming abuilding cost of RMB7.0 million per MW. The chart below set forth Roland Berger’s projection ofaddressable market size of residual heat power generation between 2013 and 2017.

Forecast for Addressable Market Size of Residual Heat Power Generationfor Chinese players (Unit: RMB in Billion)

2.38

1.09

0.98

0.95

12.12

6.72

4.59

2.86

1.19

2.72

15.84

4.48

5.95

4.01

1.26

3.86

17.61

2.52

6.63

4.54

1.28

4.39

17.96

1.12

6.46

4.45

0.91

4.30

16.96

0.84

Glass

Others

Steel

Cement-Overseas

Cement-Domestic

2013F 2014F 2015F 2016F 2017F

Source: Industrial research reports, Industrial expert interviews, Roland Berger analysis


Residual heat power generation in the cement industry is relatively mature and highlyconcentrated. In 2012, the top four enterprises (i.e., Sinoma Energy Conservation, the Group,Dalian East and Nanjing Kisen) accounted for approximately 70% of total market share.Currently, these leading providers of residual heat power generation solutions have created highentry barrier with regard to ability to provide customized solutions, core technologies and brandrecognition, and therefore enjoy competitive advantages. However smaller companies havebeen lowering their prices to gain market share in the past few years, therefore resulting indownward pricing pressure and lower profitability. However, as the domestic enterprises expandtheir business abroad and alter their service model, the gross margin and the net profit willincrease. On the other hand, since steel, metallurgical and chemical industries are highlyspecialized, the growth of residual heat power generation in these industries is relatively slowand the markets are fragmented. The major providers of residual heat power generationsolutions in the steel industry are Sinosteel MECC and Beijing Century Benefits.

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Market Share of China’s Residual Heat Power Generation in 2012(Cement Industry) in China

(by the number of cement production lines)

22.95%

20.95%

13.19%

12.94%

29.97%

Sinoma

The Group

Dalian East

Nanjing Kisen

Others

Source: Industrial research reports, annual reports and public disclosure documents

Overseas Markets

The overseas markets are mainly concentrated in South Asia, Southeast Asia, the MiddleEast and South America, where residual heat resources have not been fully explored and withlower market entry barrier. As energy prices increase across the globe, developing countrieshave been paying more attention to residual heat power generation technology. Since thesecountries are lacking in their own technologies, the barriers to entry for Chinese enterprises arecomparatively low. On the other hand, due to the high thermal efficiency of manufacturingprocesses in developed countries, the exploitable residual heat is limited and the market indeveloped countries is not attractive.

A number of Chinese residual heat power generation enterprises have entered overseasmarket (for example, Sinoma Energy Conservation, the Group and Dalian East New EnergyDevelopment, with projects mainly in South Asia, Southeast Asia and the Middle East). Chineseenterprises have gained more than 80% market share in the residual heat power generationmarket in developing countries.

Main Trends In the Industry

Diversified Business Model. The business model has transformed from the single EPCmodel to the coexistence of EPC, BOT and EMC models. The BOT and EMC models reduce theinitial investment by the companies who apply the solution (e.g. cement/steel companies),encourage the enterprise renovation, and provide the energy preservation service companieswith higher gross margins and net profits.

Downstream Application Markets Expansion. Residual heat power generation, as atransferable technology, can be applied in steel, glass, metallurgical and chemical industries.Currently, the high energy-consuming industries in China have a fairly low utilization rate of lowtemperature residual heat, and therefore, are strong potential markets.

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Geographic Expansion. Residual heat power generation has a fairly low penetration rate incement industries abroad, where technologies are relatively less advanced. China is leading theworld in terms of both the residual heat power generation technology and efficiency levels, andtherefore, has a promising future in overseas market in cement industry.

WASTE INCINERATION

Market Size of Waste Processing

In 2012, China produced 300 million tonnes of waste, among which 170 million tonnes aremunicipal waste and 80% are treated via hazard-free methods. The total waste production isexpected to grow at a rate of 8% in the coming 5 years. By the end of 2011, sanitary landfilltreatment was the most commonly used processing technique, accounting for 77% of the totalwaste processed via hazard-free methods, followed by incineration, which accounted for 20% oftotal waste processed via hazard-free methods. Waste incineration has advantages since ittakes less space, reduces higher volume and quantity, and creates less secondary pollution. Ingeneral, waste incineration is needed for the future development of cities and will beencouraged by government policies.

The Trend in Chinese Municipal Waste Processing Market

0

50

100

150

200

0

10

20

30

40

50

60

70

80

90

100

110

74

69

76

69

70

64

70

11

59

76

14

53

84

16

46

89

20

37

96

23

33

101

155 156148 152 154 157 158 164

2647

83

3 2 2 2 2 4

MunicipalWaste DeliveringQuantity (MnT)

Total No. of WasteIncineration

Plant in Operation

Total No. of Waste Incineration Plant in Operation

Compost Quantity

Waste Incineration Quantity

Sanitary Landfill Quantity

Waste Non-Hazard-FreeTreatment Quantity

2004 2005 2006 2007 2008 2009 2010 2011

Source: National Bureau of Statistics, Roland Berger analysis

Waste Incineration with Cement Kilns

Current Market Size

As of the end of 2012, there were 20 cement production lines equipped with incinerationsystem for up to 6,000 tonnes of waste per day, which implies a total investment ofapproximately RMB1.6 billion.

To apply the cement kiln waste incineration system, three factors have to be put intoconsideration: (1) the new dry-process cement line has a capacity of over 2,000 tonnes/day, (2)it should be located within approximately a 80 KM radius around cities, and (3) the line’scapacity of co-processing municipal waste has to match with the quantity of the waste thatneeds to be processed, and the composition of the processed waste and exhaust has to besuitable for cement production.

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Based on the current situation of the cement industry and the market demand trend inChina, the number of new dry-process cement production lines is expected to increase from1,637 in 2012 to 1,825 in 2014, including 1,499 lines with capacity of producing over 2,000tonnes/day. After 2014, the capacity is not likely to increase. Based on the three factors abovefor municipal waste co-processing in cement kilns, there will be 285 cement production lines inChina that are eligible for the application of cement kilns waste incineration system.


The growing amount of municipal waste that needs to be processed has been fueling thedemand for waste incineration. The PRC government has also initiated a number of financialincentives to establish more cement kiln waste incineration facilities. Based on the guidanceprovided under the 12th Five Year Plan, by the end of 2017, China is expected to have a total of150 cement production lines that are equipped with cement kiln waste incineration solution, ascompared with the 20 cement production lines at the end of 2012. The 130 additional linespresent a potential market of RMB10.4 billion in aggregate between 2013 and 2017 or a CAGRof 49.6%.

Number of Newly-Added Municipal WasteCo-processing Cement Production Lines

Investment in New Projects(RMB in billion)

12

1722

32

47

2013F 2014F 2015F 2016F 2017F

0.961.36

1.76

2.56

3.76

2013F 2014F 2015F 2016F 2017F

Source: Twelfth Five-Year Plan, Industrial expert interviews, Roland Berger analysis


The market of municipal waste co-processing in cement kilns is fairly concentrated. Thecompetition is among the Group, Huaxin Cement, Sinoma Energy Conservation and Citic HeavyIndustries. As of the end of 2012, the Group accounted for 25% market share in terms ofnumber of cement production lines equiped with cement kilns waste incineration system. In thefirst half of 2013, there were over 20 projects that have been newly announced or planned,which is more than the total number of projects as of the end of 2012.

Regarding technology, the Group offers leading technology in waste gasification that hasgood adaptability to various wastes, high resource efficiency, a simple process and withoutnegative effect on the capacity and quality of cement kilns. Moreover, it can process dioxins andcontrol stench effectively and efficiently, and harmlessly treat leachate and safely solidify heavymetals.

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PORT INDUSTRY

Market Driver

While the hinterland’s economic development directly affects the throughput of a port, thehinterland’s industry and supply structure directly affect the port’s commodity structure. Chineseports process 95% of the country’s total imported crude oil and ores, and manage 33% of thecountry’s total coal transportation volume. Therefore, the throughput of dry bulk cargo reliesheavily on the demands of ore and coal. Meanwhile, the GDP and fixed investment, which drivethe demands of ore and coal, also have impacts on the throughput of ports. In addition,government policies help the port industry to optimize its industrial structure and expand itsscale, and create a good political environment for the port industry’s future development.

Current Market Size

In 2012, the throughput of the ports in Yangtze Delta reached 3.4 billion tonnes byestimation. In recent years, the throughput in Yangtze Delta area accounted for approximately25% of the total throughput in China:

Yangtze Delta Bulk Throughput (Unit: Billion tonnes)(Refers to Shanghai, Zhejiang and Jiangsu province)

0.951.10

1.271.54

1.771.92

2.12 2.272.52

2.85

3.143.38

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E

Source: China Transportation Yearbook

Set forth below is a summary of major ports in Yangtze Delta Area and their throughputs:

Ports Throughput(milliontonnes)

SeaportsNingbo-Zhoushan Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744Shanghai Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637RiverportsSuzhou Port. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428Nanjing Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192Nantong Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Huzhou Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178Zhenjiang Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Jiangyin Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132Taizhou Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132Jiaxing Inland Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Source: Highway and Waterway Transportation Industry Statistical Bulletin

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As the Chinese economy continues to grow, the Chinese port industry is also expected tocontinue its growth. However, as the domestic economy undergoes structural transformation anddecreases its dependence on the foreign trade, China’s export is unlikely to continue its rapidgrowth it has experienced in the past decade.

Yangtze Delta Bulk Throughput Forecast (Unit: Billion tonnes)(Refers to Shanghai, Zhejiang and Jiangsu province)

3.63 3.89 4.18 4.48 4.80

CAGR 7.2%

2013F 2014F 2015F 2016F 2017F

Source: Industrial expert interviews, Roland Berger analysis


The competition exists not only among different ports with overlapping hinterlands, but alsoamong different operators within the same ports. By 2011, Jiangsu Province has 50% of thedelta’s major ports, 75% of Yangtze River Delta’s ports with a throughput of over 100 milliontonnes, and has accounted for 47.0% of the total throughput of the delta region. In 2011 and2012, the top three ports in Yangtze Delta transported 57.0% of the Delta’s total throughput.Location advantage, operation efficiency, marketing and customer management abilities play asignificant role in the success of a port. Currently, the main dry bulk cargo ports in the YangtzeRiver Delta include Nanjing Port, Nantong Port and Zhenjiang Port.

A portion of large ships cannot pass through the Nanjing Yangtze River Bridge due to itsheight limit. Therefore, cargos need to be transhipped at one of the ports located at thedownstream of the bridge. Yangzhou Haichang Port is the last downstream port that can calllarge ships with a tonnage of over 50,000 tonnes. The main bulk cargo ports at Yangzhou Portare Yangzhou Haichang Port and Yangzhou Yuanyang Port. The Yangzhou Haichang Port hasreliable demands from Conch Cement and its other business partners and a strong storagecapacity for bulk cargo (its static storage capacity is up to 1 million tonnes).

NEW BUILDING MATERIALS INDUSTRY IN CHINA

Overview

Traditional wall building materials include solid and hollow clay bricks, with solid clay bricksphasing out gradually as required by the PRC government. New wall building materials can becategorized into the following: (i) building panels; (ii) building blocks; (iii) non-clay bricks; (iv)cast-in-place or precast concrete walls; (v) steel structure and glass curtain walls; and (vi) wallmaterials blended with no less than 30% slag. Building panels, as an important category of new

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building materials, include several different types of products like gypsum boards, glass fiberreinforced cement boards, cellulose cement autoclaved (CCA) boards and wood wool cementboards (wood wool cement boards).

Market Drivers

The growth and development of new wall building materials is driven by higher energy-efficiency requirement for buildings, industrialized housing development and macro real-estatepolicies.

Energy efficiency for buildings. Currently, it is estimated that energy consumed inconnection with buildings account for 40% of the overall energy consumption in China, 10% ofwhich is consumed during the manufacturing process of building materials. In view of this, thePRC government issued a series of policies related to new and lightweight building materials,including the mandatory design criteria aimed at 50%-65% building energy saving. Thesepolicies are expected to provide favorable conditions for the development of exterior wallthermal insulation material market.

Industrialized housing development. Since the 1990’s, the PRC government haspromulgated a series of policies related to component parts certification, residential buildingperformance evaluation and industrialization base establishment. However, due to administrativeissues, underdeveloped technology and the lack of value chain integration in constructionindustry, the progress of industrialized housing development in China remains slow. In thefuture, the new wall building materials market has significant growth potential while facing therisk of developing lag in housing industrialization at the same time.

Macro real-estate policies. The development of new wall building materials market issubjected to the risk of uncertain real estate market regulations and policies.

Current Market Size

With the booming of China’s construction industry in recent years, the building areaconstructed by developers reached 3.46 billion square meters in 2012, driving wall materialmarket to grow continuously. According to ‘‘Twelfth Five-Year Plan for New Building MaterialIndustry’’, wall material market size in 2012 reached 863.4 billion standard bricks, within whichthe proportion of new wall materials is 59%. Assuming that the price of traditional wall materialsis RMB0.35 Yuan/standard brick and price of new wall materials with fire-resistant and thermal-insulation features is RMB1 Yuan/standard brick, wall material market value is aroundRMB632.2 billion in 2012.

Based on ‘‘Twelfth Five-Year Plan for New Building Material Industry’’, the applicationproportion of building panels rose quickly during the ‘‘Eleventh Five Year’’ period. With theannual production of more than 70 billion standard bricks in 2010, building panels account for8.2% in terms of production volume in all wall materials, almost doubling from the 4.2% in 2005.Meanwhile, the ‘‘Twelfth Five-Year Plan’’ put forward that the proportion of building panels in allwall materials will reach 20% by 2015. Based on this, it is estimated that the production ofbuilding panels in 2012 is around 101.1 billion standard bricks, with the CAGR of 20.1%, farexceeding the growth rate of overall wall materials. With the price of RMB1 Yuan/standard brickfor new wall materials, the building panel market reached RMB101.1 billion in 2012 byestimation.

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Market Size of Wall Material(Unit: Billion Standard Bricks)

Market Value of Wall Material(Unit: RMB in Billion)

840.9 854.5 863.4

96%

4%

92%

8%

88%

12%

CAGR 0.4%

Building Panels

Other Wall Materials

2005 2010 2012E

35.370.1

101.1499.5

531.1534.8

604.6

632.2

534.5

Building Panels Other Wall Materials

2005 2010 2012E

Sources: The 12th Five Year Plan for New Building Material Industry; Industrial expert interviews, Roland Bergeranalysis

Market for Building Panels

In 2012, the market for building panels reached approximately 101.1 billion standard bricksin terms of sales volume, or RMB101.1 billion in terms of sales value assuming RMB1 yuan perone standard brick, representing approximately 11.7% of the total wall building market in termsof sales volume, or 16.0% in terms of sales value compared to 4.2% and 8.2% in 2005 and 2010by volumn respectively. The market for wall building materials is expected to grow modestlyfrom 2013 to 2017, while the market for building panels is expected to maintain a rapid growthrate to reach 252.6 billion standard bricks or RMB292.8 billion at the end of 2017, representingapproximately 29% of the total wall building materials market. Set forth below illustrates thefuture growth rate of the market for building panel materials both in terms of sales volume andsales value:

Market Size of Building Panels(Unit: Billion standard bricks)

Market Value of Building Panels(Unit: RMB in billion)

121.8 146.2175.4

210.6252.6

CAGR +20%

2013F 2014F 2015F 2016F 2017F

125.5155.1

191.7236.9

292.8

CAGR +24%

2013F 2014F 2015F 2016F 2017F

Sources: The 12th Five Year Plan for New Building Material Industry; Industrial expert interviews, Roland Bergeranalysis

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Future Product Trends

CCA boards and wood wool cement boards are two major types of new building panelmaterials with rapidly increasing acceptance in recent years. Cement producers do not competewith producers of CCA boards and wood wool cement boards directly and sit upstream of thevalue chain, as cement is one of major raw materials for both CCA boards and wood woolcement boards. New building panel materials typically have higher prices than traditional wallpanel materials. However, due to the various desirable features and the potential saving in laborcosts, new building panel materials offer a strong value proposition and competitive advantage.

CCA Boards

CCA boards are a kind of non-asbestos fiber cement boards. Asbestos are harmful forhuman’s health, the production and import of which have been gradually prohibited by certaincountries and international organizations. With features such as fire-resistance, heat-insulation,sound-insulation, water-proof, moisture-proof, easily constructed, easily decorated,environmental friendly, lightweight, high strength, anti-corrosion, anti-pests and its relative lowcosts as compared with wood wool cement boards, the market application for CCA boards isquite broad. Specifically, the CCA boards have been widely applied in many fields such asinterior wall panels, ceilings, exterior walls, floor plates, exterior wall thermal insulation and high-speed rail noise barriers.

In 2012, the production volume of CCA boards in China amounted approximately 170million square meters, representing a CAGR of approximately 20% from 2007 to 2012, and themarket size was approximately RMB3.4 billion. Approximately 20% of the CCA boards producedin China were sold to overseas market. Currently, the average gross margin for CCA boards inChina is approximately 30% to 40%. It is estimated that the market for the CCA boards will growat a CAGR of approximately 21% from 2013 to 2017 in terms of volume. In particular, in view ofthe trend of restricting or prohibiting the use of asbestos fiber cement boards, CCA boards areexpected to have a strong growth potential. Set forth below illustrates the expected growth inthe market for CCA boards in China:

209255

311375

499

CAGR +21%

2013F 2014F 2015F 2016F 2017F

Market Size of CCA Boards in China(Unit: million square meters)

Currently, major domestic producers of CCA boards include Guangzhou Eternit, ZhejiangHeader Board, Jiangxi Kengtec, Guangdong Golden Happiness and Jiangsu Aifuxi. These fiveproducers were the largest producers in China in 2012 and accounted for approximately 40% ofthe market in terms of production volume.

Competing products that have similar features to CCA boards are glass fiber cementboards and gypsum plastorboards. As compared with glass fiber cement boards, CCA boardsare priced more competitively. On the other hand, while gypsum plaster boards carry a lowerselling price, CCA boards have higher durability and better waterproof feature.

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Wood wool cement boards

Wood wool cement boards are a kind of light-weight building panel. It has been 70 yearssince the wood wool cement boards’s wide application began in developed countries in Europe.With properties such as low-carbon and energy-saving, environmentally-friendly, fire-retardant,sound-insulation, sound-absorption, moisture-proof, antiseptic, humidity-conditioning andadaptability for design and processing, wood wool cement boards are widely applied in variousfields of building structures, as decorative materials, insulation materials, and acousticinsulations and interior wall base. Currently in Europe and the United States, wood wool cementboards are primarily used as an exterior wall component and for decorative walls for bothexternal and interior. As of the end of 2012, there were approximately 160 wood wool cementboard production lines with an aggregate production capacity of approximately 24.0 million cubicmeters in the world.

Currently, automated production technology for wood wool cement boards has beenmonopolized by the Dutch Eltomation.

Wood wool cement boards were introduced to China only recently and have gained certainmarket recognition as a decorative wall building material due to its aesthetic value. The majorityof wood wool cement boards in China are imported from Thailand and are sold at relative highprices. Currently, the average gross margin for wood wool cement boards is approximately 30%to 40%. The future trend of this market segment is closely related to the implementation of pilotprojects of national housing industrialization, the product’s market recognition driven by majorlarge enterprises and government support.

Domestic production of wood wool cement boards began in 2010. In 2012, the Ministry ofHousing and Rural-Urban Development promulgated the national standard for wood woolcement boards. By the end of 2012, Pan Asia Environmental Protection Group Limited was theonly domestic producer of wood wool cement boards, which has six production lines with totalcapacity of approximately 960,000 cubic meters.

The major competing building panel material for wood wool cement boards is pre-castingcement board. As compared with pre-casting cement boards, the higher price of the wood woolcement boards are justified by features such as highly fire-retardant and superior sound andthermal insulation.

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Warning INDUSTRY OVERVIEW - Growth Enterprise … leading international corporations, ... Berger analysis INDUSTRY OVERVIEW ... CEMENT INDUSTRY Background Information

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