Revenue and profit are under pressure, and equity investment is progressing smoothly

22FY achieved revenue of 7.135 billion yuan, -14.19% year on year, and achieved net profit of 949 million yuan to the mother, -56.40% year on year, after deducting non-net profit of 1,114 million yuan, -46.94% year on year. 23Q1 achieved revenue of 1,390 million yuan, -7.02% year on year, and net profit of the mother was 173 million yuan, -49.40% year on year, after deducting non-net profit of 144 million yuan, or -54.13% year on year. Net revenue and profit in 2022 are under pressure, which may be mainly due to poor demand for cement combined with rising prices for raw materials; 2023Q1 revenue and profit declined, which we think was greatly affected by the January pandemic. Equity investment in 2022 focused on high-quality targets for optical storage in the new energy and semiconductor industry chains. Hefei Jinghe reported that the listing of the Science and Technology Innovation Board had been successfully completed and that the new round of financing for the Guangzhou Yuexin project increased fair value by 499191 million yuan.

The high level of raw fuel materials led to a decrease in gross profit per ton of cement. The main business is still developing, and space companies sold 19.33 million tons of cement and clinker in '22, -7.12% over the same period last year. The average tonne price fell 38.12 yuan to 308.27 yuan/ton year on year, and ton cost increased 15.35 yuan to 219.44 yuan/ton year on year. The final gross profit per ton was 88.83 yuan, or -53.48 yuan/ton year on year. Aggregate revenue reached 725 million yuan in '22, +8% year on year, sales volume of 16.12 million tons, +20.74% year on year. We estimated gross profit of 35.40 yuan per ton, -4.64 yuan year on year. The company accelerated the expansion of the aggregate business. The medium term aggregate production capacity target reached more than 30 million tons, and the aggregate gross profit margin in '22 is expected to increase overall profitability. As of '22, the company has a total annual production capacity of about 16.5 million tons of cement clinker, an annual production capacity of about 20 million tons of cement, a total annual thermal power generation capacity of about 77 MW, a total annual production capacity of commercial concrete of about 600,000 square meters, and a total annual production capacity of aggregates of about 18 million tons. The company currently has cement production capacity projects under construction in Duyun, Guizhou, Zhuji, Zhejiang, and Uzbekistan and Kyrgyzstan abroad. Among them, Guizhou Duyun plans to start production in the first half of 2023. In the future, the annual production capacity of clinker is planned to exceed 25 million tons and cement to exceed 35 million tons. There is still plenty of room for the main cement industry.

Profit margins are under slight pressure, and expense rates have risen slightly

22FY gross profit margin was 33.62%, year-on-year -9.95pct, of which cement/clinic/aggregate/environmental gross margin was 27.6%/32.86%/78.7%/50.4%, respectively, and -13.0/-9.7/-1.2/-2.3pct; the period expense ratio was 13.24%, year-on-year +2.30pct, with a year-on-year change of 1.87%/8.20%/2.84%/0.33%, year-on-year change of +0.44/+1.68/+0.67/- 0.48 pct The net interest rate under the combined influence was 13.44%, -13.66 pct over the previous year. The gross profit margin of 23Q1 was 26.35%, the year-on-year rate was 14.68pct, the year-on-year expense ratio was 14.03%, the year-on-year +0.93pct, of which the sales/management/R&D/financial expenses ratio was 2.32%/10.63%/0.02%/1.05%, the year-on-year change was +0.33/+0.75/-0.26/+0.11pct. The net interest rate under the combined influence was 11.35%, -11.16pct over the previous year.

Internal synergies are expected to continue to strengthen. Maintaining the “buy” rating, we believe construction will accelerate or boost demand for cement. Sales are expected to improve marginal, compounded by price increases, and profits from the main business are expected to pick up. At the same time, the profit contribution of aggregates and environmental protection businesses is expected to gradually increase, and the company actively participates in equity investment in new economy industries and cooperates with leading technology enterprises in the new energy industry to develop new energy businesses such as photovoltaic power generation. “One master, two wings” can be expected to develop new energy businesses such as photovoltaic power generation. Considering that the company's 22-year performance was under a lot of pressure, the 23-24 performance was lowered to 1,41/1.7 billion yuan (previous value of 1,885/2,05 billion yuan), and the 25-year net profit returned to the mother was introduced of 1.87 billion yuan to maintain the “buy” rating.

Risk warning: cement demand falls short of expectations, peak season price increases fall short of expectations, coal costs rise, etc.