Measuring the quality and effectiveness of the equity story communication: the cement industry case study

As mentioned in my article “How to measure stock reputation”, the quality and effectiveness of communication is the fourth criteria to rate stock reputation. For this case study and to follow the news, I decided to analyze the communication of the seven largest listed cement producers in the world, namely Anhui Conch (China), Lafarge (France), Holcim (Switzerland), CNBM (China), HeidelbergCement (Germany), Italcementi (Italy) and Cemex (Mexico). For this review, I mainly referred to information available on their websites (annual reports, investor presentations, financials results…).

Note that although the needed documentation was available in the Investor Relations website section for the western companies, it was not always the case for the Chinese companies. Their English language websites do not work well, are not up-to-date and disclose very limited information. To make my analysis and study the latest annual reports and results press releases, I had to go to the Hong Kong Stock Exchange website, where it is mandatory for listed companies to publish.

Business model communication

The first thing to look at in order to measure the quality and effectiveness of communication is the way companies communicate of their industry, their business model and their key profit drivers. Based on their disclosure, I rated communication by these companies from zero to four, with four being the highest.

Overall, western companies describe their activities and positioning relatively well. They highlight their strengths, but do not say much about their risks and weaknesses. Similarly, they could communicate more about their industry and are not specific enough on their key profit drivers. They do not explain much about price and volume dynamics and do not give details on their costs.

Saying that, HeidelbergCement is better rated than the average on this criterion due to a detailed presentation made for their investor day and specific slides which comment on key profit drivers. On the contrary, Anhui Conch and CNBM are poorly rated due to the limited description of activity in their annual report, which, beyond financial numbers, does not allow the investor to really understand and analyze their business model.

Strategy communication

The communication of the strategy is the second element to study. The strategy has to be properly explained and communicated, has to go beyond day-to-day management, and has to include quantitative targets. As I did previously, based on disclosures, I rated the quality and effectiveness of this communication from zero to four.

Holcim’s communication on strategy is excellent. The Swiss producer gives a good explanation of its strategy in its documentation (in particular its investor day presentation), clearly highlighting its priorities, and precisely quantifying its targets. Also, Holcim goes beyond its day-to-day management and explains its long-term vision with the Lafarge merger. Also, if the merger would not take place, this will represent a major set back for the group.

Alternatively, the Chinese communication on strategy is particularly poor. Anhui Conch explains that its strategy is to adapt and CNBM to reduce cost and debt (the contrary would have been surprising!). The two producers are willing to expand their activity internationally and to participate in M&A activity but are not providing any rationale for this.

Capital allocation communication

Besides strategy disclosure, capital allocation– including the dividend policy – needs to be formerly disclosed and explained. Once again, I rated this communication from zero to four.

Once again, Holcim and HeidelbergCement obtain the best rating on this criterion. HeidelbergCement is the only company of our sample to formally disclose a dividend policy (a targeted pay-out ratio). Holcim only provides some indication about its dividend intention but, on the other hand, is explicit on its approach to capital allocation and priorities for the use of cash (a section is dedicated to this area in its investor day presentation). 

On the other end, despite distributing a dividend, the Chinese groups do not mention cash allocation or dividend policy anywhere in their publications.

Results and performance communication

Beyond communication on business model, strategy and capital allocation, the way that results and performance are communicated is critical. As before, this communication was rated from zero to four.

Overall, western companies have a good level of disclosure and very similar communication results. All publish detailed quarterly results, with investor presentations, and the investor conference call is available on replay. Holcim is also adding a downloadable Excel model of its accounts.  They all communicate on outlook and annual trends but, unfortunately, none provide formal and quantified quarterly guidance.

Once again, Chinese corporate are at the bottom of the ranking. Their quarterly communication (outside annual and interim results) is extremely limited. In addition, no presentation is available and they do not organize any calls with investors (at least officially).

Communication coherence

Coherence is the last thing to look at in order to judge the quality and effectiveness of communication: not only the overall coherence of the equity story but also the right information, which allows the building of a good financial model. One last time, I rated this communication from zero to four.

Until yesterday, Holcim and Lafarge would have been excellent on this criterion. Both gave all necessary information needed to generate a good financial model, but mainly they were presenting a convincing equity story resulting, in particular, from their merger project. Their announcements that they may not pursue their merger impact strongly their communication coherence and credibility.

Chinese companies are also again badly rated but CNBM is doing better than its domestic competitor due to the annual disclosure of several divisional indicators allowing for the building of a proper financial model.

Conclusion

By adding the results on these criteria, it was possible to globally rate the quality and effectiveness of the equity story communication of each company. This rating will give the fourth stock reputation measurement.

As expected the Chinese cement producer are at the bottom of the ranking. Clearly, they seem willing to only disclose the strict minimum required under Hong Kong securities law. As a matter of fact, they are primarily China's state-owned companies and do not have to be concerned about private shareholders.

On the contrary, until yesterday, Holcim would have obtained the best rating and Lafarge a good rating. Not everything was perfect, but the two companies were explaining their equity story in detail and extensively communicate on the merger benefit. Their latest statement re-challenging their merger is a strong setback. This shows to investors that they have been subjected to months of misinformation. Whatever happens (the deal does go ahead or not), this story will impact their reputation on the stock market for long.