Main points of investment

The company released half-year results: realized income was 3.311 billion yuan, up 27.2% from the same period last year; gross profit was 1.131 billion yuan, up 17.0% from the same period last year; gross profit margin fell slightly from 37.1% in the first half of 2018 to 34.2% in the first half of 2019; profit attributable to owners of the company was 794 million yuan, an increase of 22.7% over the same period last year; basic earnings per share were 14.6 points, and the proposed interim interest rate was 3.6%.

Both the volume and the price have risen, and the income has greatly increased. 2019H1 cement sales of 8.45 million tons, an increase of 3.8% over the same period last year, the main increase in the contribution of the southern Shaanxi market. Regional prices remained good, with a price of 342 yuan per ton, up 29 yuan / + 9.3% from the same period last year and 27 yuan / + 8.6% month-on-month. At the same time, the company relies on its own mines as a supporting industry, four aggregate production lines with a total production capacity of 7 million tons have been put into operation, and we expect to contribute about 10-14% of the performance increment.

With the continuation of the tight policy of environmental protection, the cost pressure of the company is highlighted. The cost of cement per ton of the company increased by 24 yuan / + 12% over the same period last year to 217 yuan / ton, up 4 yuan / + 2% from the previous month. Rising coal prices, stricter environmental protection policies for raw materials, rising staff costs and environmental protection expenditure are the main reasons. Among them, the cost of coal per ton of cement increased by 6.2 yuan, the cost of raw materials increased by 8.4 yuan, staff salaries increased by 4.5 yuan, and environmental protection expenditure increased by 8.6 yuan.

The slight decline in the gross profit margin of the cement plate is caused by the base. It is understood that the environment-related costs are mainly included in the second half of 18 years, resulting in a higher base in the first half of the year. The gross profit margin of the cement plate for the whole year of 18 years is 35%. 19H1 has improved.

The increase in employee salary, environmental protection-related plant maintenance and greening expenses caused the company's ton fee to increase by 5.2 yuan to 38.9 yuan per ton.

Yaobai environmental protection is becoming more and more mature, contributing new profit points. The return on financial leasing business is OK.

Our view.

We maintain the company's profit forecast of 1.721 billion, 1.759 billion and 1.801 billion yuan respectively for 2019-2021, and maintain the "prudent overweight" rating and the target price of HK $1.73.

From the perspective of absolute valuation and relative valuation, the company's share price is still grossly undervalued. We expect that the free cash flow in the next three years will fully cover capital expenditure and planned net debt repayment, and the company's dividend ratio is expected to increase to the industry average. It is a sign that the company plans to increase its dividend ratio to 25% in the medium term. 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.

Risk hints: economic deterioration, industry synergy breakdown, raw material price fluctuation, credit risk, equity dispute, corporate governance risk