Our view: we expect the company to achieve a return net profit of 1.721 billion yuan, 1.759 billion yuan and 1.801 billion yuan respectively from 2019 to 2021, maintaining a "prudent overweight" rating with a target price of HK $1.73.
We have been advising medium-and long-term investors who attach importance to absolute returns for 18 years. The company's stock price has performed well recently, but the company's stock price is still grossly undervalued from the perspective of DCF absolute valuation and relative valuation. The reason for restricting the valuation repair is dividends. We expect operating cash inflows of 2 billion per year in 19 years, which can fully cover capital expenditure and planned net debt repayment, and the company's dividend ratio is expected to increase to the industry average. From a medium-term point of view, Guanzhong was approved as the eighth national urban agglomeration, the company is located in a good market under a good pattern, profit sustainability is guaranteed, we are optimistic that the company valuation will continue to be repaired.
Company profile: Western cement is the largest cement manufacturer in Shaanxi Province, which occupies a leading position in southern Shaanxi and the eastern part of Guanzhong. Xinjiang and Guizhou also have layout.
Analysis of Shaanxi market pattern and cement demand potential: a good market under a good pattern, high profit and sustainable. Shaanxi market concentration is high, the west, conch, Jidong three parts of the world, the western cement corner, to avoid the fierce competition in Kansai, the integration of southern Shaanxi and Kanto markets. Over the past 19 years, large enterprises have launched 10,000-ton line replacement projects to further enhance the competitiveness of enterprises.
In 2018, the National Development and Reform Commission issued the Development Plan of Guanzhong Plain Urban agglomeration. Guanzhong has become the eighth national urban agglomeration and will continue to play the siphon effect to further attract capital, talent and other resources to Shaanxi. With reference to the per capita cement demand of seven other national urban agglomerations, Guanzhong Plain is obviously low, supporting infrastructure construction and real estate investment will ensure the medium-and long-term demand for cement.
The company ploughs the regional leader and relies on the industrial chain to expand new business: (1) relying on its own mines, the company plans to achieve an aggregate production capacity of 20 million tons within 3-5 years, with an increase of 17% and 30% compared with the current income and gross profit, with high profitability and development space. (2) Yaobai, a joint venture with China Conch Venture, is becoming more and more mature in environmental protection, and waste disposal has contributed to a new source of profit.
Risk hints: economic deterioration, industry synergy breakdown, raw material price fluctuation, credit risk, equity dispute, corporate governance risk