The company's revenue/net profit attributable to the parent in 2019 was +23%/+55% year on year. The performance was in line with expectations, and the payout rate continued to increase, corresponding to a static dividend rate of 8.7%. The volume and price of cement increased sharply throughout the year. The redemption of priority notes and the increase in interest on financial leases have led to a sharp drop in financial expenses, a continuous increase in operating cash flow, and a marked decrease in net debt ratios. Aggregate merchants gradually released concrete production capacity and entered the international cement market. Major projects are expected to be started one after another to support cement demand in Shaanxi, and material prices will rise steadily in 2020; in the medium term, benefiting from the progress of Shaanxi's “Belt and Road” construction, internal materials will maintain a sharp upward trend in volume and price in the medium term. Taking into account factors such as the support demand for major infrastructure projects, the gradual advancement of the “Belt and Road” construction in Shaanxi, and the favorable supply pattern in Shaanxi, we maintained our net profit forecast for 2020 to 2021 of RMB 21.1/227 billion, adding a net profit forecast of RMB 2.39 billion for 2022. The corresponding EPS forecast was $0.39/0.42/0.44, the current price corresponding to PE was 2.9x/2.7x/2.5x, maintaining the target price of HK$2.20 (corresponding to 1.0 times PB in 2020) and the “buy” rating.

The company's revenue/net profit attributable to the parent in 2019 was +23%/+55% year on year. The performance was in line with expectations, and the payout rate continued to increase, corresponding to a static dividend rate of 8.7%. In 2019, revenue was 7.25 billion yuan (+22.6% YoY), gross profit was 2.44 billion yuan (+22.9% YoY), total profit was 2.24 billion yuan (+37.5% YoY), and net profit of 1.80 billion yuan (+55.4% YoY). The performance was in line with expectations. Factors such as lower costs and increased tax incentives such as R&D expenditure led to faster profit growth than revenue growth. By product, in 2019, the revenue of cement/aggregate/commercial concrete was 62.6/0.8/49% (+10%/+221%/+300%), gross profit of 22.6/0.4/10 billion yuan (+13%/+184%/+349% over the same period), cement increased steadily, and the volume of aggregates and commercial concrete increased. 2H19 revenue/net profit of HK$3,94/1.01 billion, +18.9%/+96.6% year on year. The company overcame the adverse effects of rain disturbances and improved quality and efficiency in the second half of the year. Reduced costs and expenses led to a high year-on-year increase in profit. The company's payout rate for the full year of 2019 was 30% (+18pcts year over year), of which the 2H19 dividend rate reached 34%, and the current corresponding static dividend rate is 8.7%.

Sales of 2H19 continued to increase steadily, and cement prices fell month-on-month due to rain disturbances, and volume and price increased sharply throughout the year. In terms of sales, the company sold 18.8 million tons/1.98 million tons/900,000 square meters of cement/aggregate/commercial concrete in 2019, +3.9%/+288%/+260%, of which 2H19 cement sold 10.35 million tons (+3.9% year on year). Sales continued to increase steadily under 3Q19 rain disturbances, but 2H19 prices fell 16 yuan to 326 yuan month-on-month (+11 yuan over the previous year, +3%); the price of cement tons in 2019 was 333 yuan (+19 yuan, +6% year on year) Achieved a sharp rise in volume and price. By subregion, cement sales in southern Shaan/ Guanzhong/ Xinjiang/ Guizhou in 2019 were 806/786/179/1.29 million tons (+6.9%/+2.8%/+6.5%/-8.5%), and the corresponding average tonne sales price was 333/319/440/263 yuan (+6/+22/+80/-15 yuan over the same period last year). Southern Shaanxi is still the core driving force of volume and price; prices in Guanzhong have continued to rise; prices in Xinjiang have jumped due to false peaks and the exit of low-grade cement; volume and price in Guizhou have all weakened.

The decline in coal prices combined with the increase in production capacity operation rate caused the cost of 2H19 to fall month-on-month, and the gross profit of cement tons increased year-on-year throughout the year. The cost of the company's tons of cement in 2019 was 213 yuan (+9 yuan over year, +4%), of which the cost of 2H19 tons was 210 yuan (month/year over year - 7/-3 yuan), benefiting from the decline in 2H19 coal prices. Furthermore, the company increased the production capacity operation rate during the peak period by building new clinker warehouses and increasing clinker storage capacity, which reduced the cost of 2H19. Looking at the cost structure, the cost of one ton of raw materials/coal/electricity/other costs in 2019 was 58/59/33/63 yuan, compared to +8/+3/+1/-3 yuan. The cost of raw materials continued to rise under the environmental control upgrade; coal costs first rose and then fell, and increased throughout the year.

Among them, the cost of 2H19 tons of raw materials/coal/electricity/other costs was 59/58/33/60 yuan, +2/-3/+0/-6 yuan over the previous month and +8/+3/+1/-15 yuan compared to the previous year. Looking at gross profit per ton, gross profit per ton of cement in 2019 was 120 yuan (+10 yuan, +9% year on year), gross profit of aggregate tons was 19 yuan (-7 yuan year on year, -27%), commercial concrete's gross profit per party was 106 yuan (+21 yuan, +25% year on year), and the company's comprehensive gross profit margin in 2019 was 33.7%, +0.1pct year on year.

The redemption of priority notes and the increase in interest on financial leases have led to a sharp drop in financial expenses, a continuous increase in operating cash flow, and a marked decrease in net debt ratios. The company's comprehensive expense ratio in 2019 was 5.5% (-2.6pcts year on year), of which the sales/management/finance expense ratio was 0.8%/5.3%/-0.6%, respectively -0.1/-0.4/-2.1pcts, respectively; financial expenses decreased by 130 million yuan to -40 million yuan year on year, mainly due to priority note redemption (related interest decreased by 90 million yuan to 210 million yuan year on year) and high financial lease interest income (increase of 90 million to 210 million yuan over year). In terms of cash flow, net operating cash inflow in 2019 was $2.61 billion (+4.6% year on year); net investment cash outflow was $2.010 billion (net outflow for the same period last year was $1.68 billion); and net fund-raising cash outflow was $7.1 billion (net outflow for the same period last year). The company's net debt ratio fell 8.5 pcts to 17.5%.

Aggregate merchants gradually released concrete production capacity and entered the international cement market. The company's annual aggregate production capacity in 2019 was 15.1 million tons, +116% year on year; commercial concrete had an annual production capacity of 4.55 million square meters, +72% year on year. With the gradual release of aggregate and commercial concrete production capacity, it is expected to make an important contribution to the company's performance growth in the future. Furthermore, the company is actively developing the international cement market. In September 2019, the company built a special cement production line in Mozambique, which is expected to be put into operation in September 2020, with strong competitiveness in local production costs. At the same time, in January 2020, the company announced that it plans to acquire local cement company Schwenk Namibia. Schwenk Namibia is one of only two cement manufacturers in Namibia, which is expected to fully benefit from the growth in local cement demand.

Major projects are expected to be started one after another to support cement demand in Shaanxi, and material prices will rise steadily in 2020; in the medium term, benefiting from the progress of Shaanxi's “Belt and Road” construction, internal materials will maintain a sharp upward trend in volume and price in the medium term. We expect the epidemic to affect Q1 demand by about 30%, but Q1 is a traditional low season, and after the epidemic, major projects such as the Xi-Yu/Seibu/Xiyan high-speed rail are expected to start one after another within the year to support cement demand in Shaanxi. We expect the company's materials to rise steadily in 2020. Furthermore, on April 1, the Shaanxi Provincial Government issued the “Notice on Issuing the 2019 Action Plan for the “Belt and Road” Construction”, which calls for promoting the optimization and upgrading of transportation, trade and logistics centers, including the construction of an international aviation hub in Xi'an, the continuous improvement and optimization of the Road Grid Bureau, and speeding up the construction of logistics hubs. We believe that, benefiting from the advancement of the “Belt and Road” construction in Shaanxi and the continued increase in the local urbanization rate, demand for cement in Shaanxi is expected to increase steadily in the medium term. Combined with Shaanxi's better pattern and orderly production, domestic materials will maintain a sharp upward trend in volume and price in the medium term.

Risk factors: epidemic control falls short of expectations, progress of major projects falls short of expectations, rain and weather disturbances, etc.

Investment suggestions: Taking into account factors such as major infrastructure project support requirements, the gradual advancement of “Belt and Road” construction in Shaanxi, and the favorable supply pattern in Shaanxi, we maintained the net profit forecast for 2020 to 2021 of RMB 21.1/227 billion, an additional net profit forecast of RMB 2.39 billion for 2022, the corresponding EPS forecast was $0.39/0.42/0.44, the current price of corresponding PE was 2.9x/2.7x/2.5x, maintaining the target price of HK$2.20 (corresponding to 1.0 times PB in 2020) and the “buy” rating.