Summary of the research report:

Investment tips for this issue:

Cement sector: Price performance exceeded expectations, net profit increased 121% year on year, and regional differentiation was obvious. The cement sector showed strong performance in the first half of the year. In January-May, the cement industry achieved a cumulative profit of 51.5 billion yuan, an increase of 117% over the previous year, reaching a record high. Among them, the net profit of listed companies is expected to grow 121% year-on-year. The high growth in performance is mainly due to price flexibility. The supply-side contraction brought about by corporate self-discipline, policy guidance, and environmental upgrades during this period exceeded market expectations. Among the 10 cement companies that Shenwan Hongyuan focused on, those that increased by more than 100% include: Sichuan Shuangma (495%), Wannianqing (467%), Huaxin Cement (184%), Tapai Group (172%); those that turned losses into profits included: Jidong Cement, Qingsong Jianhua, and Fujian Cement; negative year-on-year increases include: Ningxia Building Materials (-22%) and Qilian Mountain (13%). The main reason behind the differentiation is the imbalance in regional cement demand. From January to June, the country's cement production fell slightly by 0.6%, but only the central, southern and southwestern regions achieved positive growth, with a decline of more than 10% in the northwest and northeast.

Glass sector: Price performance fell short of expectations, and net profit increased 32% year over year. The weak performance of the glass sector in the first half of the year was mainly due to (1) the deterioration of the relationship between supply and demand. In January-June, the country's flat glass production rose slightly by 1.2%, but supply contracted less than expected during the same period. In the first half of the year, there were 6 cold repair production lines, 9 production lines resumed, and 2 new production lines were built. The net increase in new production capacity is expected to impact 1.7%; (2) cost increases, in addition to the marginal increase in costs brought about by environmental protection and high pressure in the first half of the year, the sharp rise in soda ash prices further eroded the profits of the glass industry. Among the 7 glass companies that Shenwan Hongyuan focused on, those that increased by more than 100% include: Luoyang Glass (670%), Yaopi Glass (319%), and Amaton (156%); those that increased by 50%-100% included Jinjing Technology (93%); those that increased by 0% to 50% included: Kibing Group (35%) and King Kong Glass (25%); the year-on-year decline included: CSG A (-5%).

Consumer building materials: Net profit increased 67% year on year, and the performance of industry segments was divided. In the first half of the year, pessimistic expectations of medium- to long-term real estate, financial tightening brought about by deleveraging, and changes in the demand structure brought about by the trend of refinement affected the performance of industry leaders in different segments. Among the nine companies that Shenwan Hongyuan focused on, those that increased by more than 100% include: Dior Home (564%), Punai (215%), Beijing Lier (171%), and Luyang Energy Saving (101%); those that increased by 50%-100% included: Beijin Construction Materials (80%); those that increased by 0% to 50% include Karen (35%), Dongfang Yuhong (25%), Weixing New Materials (22%), and Keshun (17%).

Investment strategy: In the cement sector, “the off-season is not light” in the second half of the year. Continued improvement in the clinker supply and demand pattern will support cement prices, and high profit sustainability is likely to exceed expectations; in the post-supply-side period, the cement sector stock selection logic needs to focus on the three main lines of regional attributes, growth attributes, and resource attributes to select companies that are flexible in the short term, grow in the medium term, and can win in the long term. We recommend focusing on regional attributes and growth attributes. We recommend Huaxin Cement and Conch Cement. In the glass sector, there are signs of phased delays in the release of demand and the discontinuation of cold repairs. The centralized release of dividends will be delayed but will not be absent. Furthermore, in the context of stricter environmental protection, the comparative advantage of gradually expanding the comparative advantage of high-quality leaders due to the increasingly smooth cost curve is a definite opportunity. It is recommended to focus on Kibing Group. In the consumer building materials sector, we believe that the core logic of leading companies as the backbone of a growing sub-industry has not changed. The pessimistic outlook for medium- to long-term real estate, changes in the downstream demand structure, and the mistaken killing of some high-quality leaders in the context of tightening financing and rising raw material prices have provided the market with a window to fix expectations. We recommend Beijin Construction Materials, Dongfang Yuhong, Weixing New Materials, and Diou Home Furnishing.

(Shen Wan Hongyuan)