Key points of investment:
Incident: Recently, the company released its 2019 annual report. The company's 2019 turnover was about 7.25 billion yuan, an increase of 22.6% over the previous year; Guimu's net profit was about 1.80 billion yuan, an increase of about 55.4% over the previous year; and EPS was about 0.331 yuan. The company plans to pay 0.063 yuan/share at the end of the year (cumulative annual dividend of 0.099 yuan/share).
Comment:
Volume, price, and profit have risen sharply, the Xinjiang region is bright, exchange losses have been reduced, and net profit of tons returned to mother is the same as in 2010, reaching the highest level in history.
1) The company sold 18.82 million tons of cement in 2019, an increase of 4.0% over the previous year. Looking at the subregion: the base, Shaanxi, grew 6.9% and the fastest growth rate. The Xinjiang and Guanzhong regions increased 6.5% and 2.8% respectively, and Guizhou declined 8.5%;
2) In 2019, the company's cement price was about 333 yuan/ton, an increase of 19 yuan/ton over the previous year. Looking at the subregion, Xinjiang rose sharply by 80 yuan/ton, the southern Shaanxi and Guanzhong regions rose 6 and 22 yuan/ton respectively, and Guizhou fell 15 yuan/ton year on year;
3) The company's tonnage cost increased year-on-year in 2019. Among them, due to the increase in the average purchase price of thermal coal, the tonnage cost was increased by 3.2 yuan/ton, the raw material cost increased by 8 yuan/ton, and the labor cost increased by 2.4 yuan/ton. The total of the three was about 13.6 yuan/ton. Due to the further increase in tonnage revenue, the company's tonnage margin increased by about 5.4 yuan/ton year on year;
4) Exchange losses in 2019 were about 21.5 million yuan, a sharp decrease from 127.6 million yuan in 2018, increasing the company's net profit attributable to the mother. In 2019, the company's net profit from tons of cement clinker to the mother was about 93 yuan/ton, which was basically the same as 2010, the highest in history.
After the 10,000 ton line was approved and put into operation, it helped enhance the company's competitiveness in the Guanzhong region. The debt ratio was drastically reduced, and the dividend rate rose to an all-time high.
1) The Guanzhong region centered on Xi'an is one of the regions with the highest demand in Shaanxi Province. The company's Tongchuan (less than 100 km from Xi'an) 10,000 ton line has been approved and is about to be built. We expect it to be put into operation in 2021.
Major projects such as the Xi'an-Yan'an Expressway, several Guanzhong Intercity Railways, and Xi'an Xianyang International Airport Phase 3 have already started or are expected to commence. We believe that demand in Guanzhong is guaranteed, and that the commissioning of new production lines will help enhance the company's voice and competitiveness in the Guanzhong region;
2) The company's dividend rate increased to 30% in 2019, a significant increase from 12.2% in 2018 and an increase from 20%-25% in previous years. The company's net asset to debt ratio fell from 26.0% at the end of 2018 to 17.5% at the end of 2019. We believe there is still a lot of room for improvement in the company's dividend ratio after meeting the company's 10,000 tonne expenses.
Maintain a “better than the market” rating. The company paid 0.099 yuan/share throughout the year, with a dividend payment ratio of 30%, a sharp increase from 2018; interest-bearing debt was drastically reduced, and the asset structure continued to be optimized; the company's 10,000 ton line is expected to be put into operation next year to increase its contribution. We expect the company's EPS in 2020-2022 to be around 0.38, 0.40, and 0.43 yuan/share respectively, giving the company 6-7 times its 2020 PEE, and a reasonable value range of HK$2.53 to HK$2.96 (HK$1 = 0.9 RMB), maintaining the “superior market” rating.
Risk warning. Coal prices have risen sharply; infrastructure projects in Shaanxi are progressing slowly.