The 2013 results slightly exceeded the consensus forecast that Shanshui achieved a net profit of 1.017 billion yuan in 2013, equivalent to 0.36 yuan in EPS, down 33% from a year earlier, higher than Bloomberg's consensus forecast of 992 million yuan and in line with our forecast of 1.031 billion yuan. The gross profit per ton in 2013 is 61 yuan per ton, which is higher than our expected gross margin of 56 yuan per ton, corresponding to 56 yuan per ton in the second half of the year. In 2013, the company achieved sales of 63 million tons, an increase of 10% over the same period last year, which is in line with our expectations. The management cost of ton sales is 25 yuan / ton, an increase of 2 yuan / ton over the same period last year. The effective tax rate climbed from 27 per cent in 2012 to 33 per cent in 2013.
Operating cash flow is good, but net financial leverage has risen: 1.925 billion, down only 0.3 per cent from a year earlier, although net profit is down 33 per cent from a year earlier. The number of days of receivables and inventory rose from 77max 54 days in 2012 to 8756 days in 2013, while the number of days of accounts payable rose from 130 days in 2012 to 144 days in 2013. As a result, working capital turnover days improved from 14 days in 2012 to 10 days in 2013. The net debt ratio rose further to 164 per cent from 151 to 143 per cent in 1H13/2012.
The peak of capital expenditure has passed, and the inflection point of current leverage and corporate free cash flow in 2014 will be 4.2 billion in 2013 and 2.1 billion in 2014. As capital expenditure halves and 10 new lines are put into production in the second half of 2013 and the first half of 2014, the company's free cash flow is expected to turn positive in 2014, leading to a reversal of the net asset-liability ratio.
Expectations for 2014 are more optimistic than the market. Our survey found that the recovery of demand in Shandong market is better than expected (about 66% of sales exposure), mainly due to infrastructure pull. So we expect the company's sales to grow by 15% year-on-year in the first quarter of 2014. Since mid-March, according to our estimates, the company's daily shipments have returned to the level of 18-190000 tons per day, compared with the average daily shipments of 160000 tons per day in March 2012. Looking back, we believe that the gross margin of the Shandong market will recover further due to the improvement of supply and demand.
To reiterate the buy rating, 2014 gross margin has upside risks. Our 2014 earnings forecast already reflects the recovery and is 32% higher than consensus expectations. We reiterate our buy rating, corresponding to a target price of HK $3.61 and a multiple of 6 times 2014 forecast earnings. Our 2014 gross profit per ton is assumed to be 68 yuan per ton and the sales volume is assumed to be 68 million tons. We think there is an upside risk to our gross margin assumption: every 5 yuan / ton increase in gross margin per ton will lead to a profit forecast increase of about 15% in 2014. Looking ahead, the higher-than-expected rise in cement prices in April in March in Shandong and the restoration of investor confidence in the real estate sector will be the catalyst for cement share prices to rise.