The company announced results for the first half year of 2020: revenue of 3,08.7 billion yuan (same unit below), down 9.1% from the previous year; gross profit of 1,047.6 million yuan, down 7.4% from the previous year; profit attributable to the company's owners was 752.3 million yuan, down 5.3% from the previous year; the basic profit per share was 13.8 points; the company did not pay interim dividends (3.6 points per share for the same period last year, 25% dividend rate).
Our review is as follows:
The performance of the Shaanxi market was average. Cement revenue fell 10.2% year on year, volume fell slightly by 2.5%, and prices fell 7.9%.
Demand for cement in Shaanxi Province fell 6.2% in the first half of the year, and the company's cement & clinker sales fell slightly by 2.5% year on year. Looking at the subregion, the southern Shaanxi market was seriously dragged down. Sales in southern Shaanxi fell 19%, sales in Guanzhong increased 10%, sales in Xinjiang increased 23%, and sales in Guizhou increased 9%. Regional prices have all declined, with an average selling price of 315 yuan, down 27 yuan/ -7.9% year on year. Southern Shaanxi is also a serious drag. It is not common for cement prices in Guanzhong to be higher than in southern Shaanxi.
The cost of tons fell 12 yuan/ -5.5% to 205 yuan/ton, gross profit of tons fell 15 yuan to 110 yuan/ton, gross profit margin was 35%, a year-on-year decrease of 1.5ppt. Among them, coal usage costs for tons of cement fell by 12.4 yuan (-20%), electricity costs fell by 3.0 yuan (-9%), raw material costs increased by 5 yuan (+5%), and employee salaries fell 2.4 yuan (-15%).
Extending the industrial chain, aggregate/commercial mixing entered rapid development, and revenue increased 46%, accounting for 11% of revenue.
Expenses were properly controlled, and the tonne fee dropped slightly by 5 yuan to 34 yuan/ton over the same period last year, mainly due to savings in financial expenses. Although the scale of interest-bearing debt has increased, companies have optimized the debt structure (the share of bill discounts has increased) and optimized the cost of borrowed capital to decrease.
The financial leasing business continues to shrink. The company plans to keep it at the level of 1 billion over the next three years. The capital will focus on finding business opportunities such as overseas business/domestic mergers and acquisitions/industrial chain extension/special cement.
Our point of view:
We expect the company's net profit to be 18.53, 19.49 and 2,063 billion yuan respectively in 2020-2022, with year-on-year growth rates of 2.8%, 5.2%, and 5.8% respectively. The increase in profit stemmed from the rapid development of aggregate and commercial mixing businesses.
The current stock price corresponds to 4.3 times 2020, and the PB valuation is 0.77 times (0.9 times the historical center). If a 30% payout ratio is maintained throughout the year, the potential dividend rate is 7%. Failure to pay interim dividends will drag down stock price performance. We maintain our “prudent increase” rating and target price of HK$1.73.
Risk warning: economic deterioration, collapse of industry collaboration, fluctuations in raw material prices, credit risk, equity disputes