What happened: the company disclosed that the annual report of 2022 and the quarterly report of 2023 showed that the operating income in 2022 was 7.135 billion yuan, down 14.19% from the same period last year; the net profit was 949 million yuan, down 56.38% from the same period last year; and the non-net profit was 1.114 billion yuan, down 46.91% from the same period last year. In the first quarter of 2023, the operating income was 1.39 billion yuan, down 7.02% from the same period last year; the return net profit was 173 million yuan, down 49.40% from the same period last year; and the non-net profit was 144 million yuan, down 54.13% from the same period last year. The comments are as follows:

Affected by the falling volume and price of cement and high costs and other factors, the full-year results are under pressure. In the fourth quarter alone, the company's operating income fell 24.85% year-on-year to 1.971 billion yuan, net profit fell 82.51% to 103 million yuan, and non-net profit decreased 87.84% to 70 million yuan. 1) the business income of sand and gravel aggregate and environmental protection disposal keeps growing. In 2022, the company's sand and gravel aggregate / environmental protection disposal business realized operating income of 725 million yuan respectively, an increase of 8.36 percent over the same period last year, and cement / clinker business realized an operating income of 45.78 million yuan, down 22.02 percent respectively over the same period last year. From a regional point of view, East China / Northwest / Southwest regions achieved revenue of 54.80 / 1.23 billion yuan respectively, with year-on-year changes of 18.56 / 18.04 / 21.84% respectively. 2) the price fell and rose, superimposed with changes in the sales structure, resulting in a year-on-year decline in gross profit margin / net profit margin of 9.96/13.67pct to 33.62 per cent. 13.44 per cent. In 2022, the company's cement / clinker sales unit price (including tax) decreased by 13.20% to 348.12 pound 346.25 yuan / ton respectively compared with the same period last year. At the same time, high raw fuel prices, coupled with an increase in the proportion of sales of the western subsidiary with low gross profit margin, led to a year-on-year decline in cement / clinker business gross profit margin of 12.99/9.74pct to 27.60max 32.86%. The gross profit margin of sand and gravel aggregate remained basically stable, falling by 1.19pct to 78.73% compared with the same period last year. 3) the production and sales of cement show toughness, and the production and sales of sand and aggregate increase steadily. In 2022, the company's cement production and sales reached 14.8735 million tons, which decreased slightly by 2.85% compared with the same period last year; clinker production and sales decreased by 5.69% to 1.4554 million tons, respectively; and sand and aggregate production and sales increased by 20.80% to 1613.00 million tons, respectively. In terms of production capacity, by the end of 2022, the company's total annual production capacity of cement clinker is about 16.5 million tons, the total annual cement production capacity is about 20 million tons, the annual waste heat power generation capacity is about 77MW, the total annual production capacity of commercial concrete is about 600,000 square meters, and the total annual production capacity of aggregate is about 18 million tons. 4) the operating cash flow decreased and the expense rate increased. The net operating cash flow of the company in 2022 was 1.02 billion yuan, down 64.07% from the same period last year.

During the period of the company, the expense rate increased by 2.3pct to 13.24% compared with the same period last year, of which the sales / management / financial expense rate was 1.87, 8.20 and 0.33%, respectively, with year-on-year changes + 0.44/+1.66/-0.48pct.

Q1 market demand is weak in 23 years, and the performance is temporarily under pressure. Affected by the epidemic and the Spring Festival holiday, the market demand of the cement industry was weak from January to February, and the market began to pick up gradually after March. The operating income of Q1 company was 1.39 billion yuan, down 7.02% from the same period last year; the net profit of returning to the mother was 173 million yuan, down 49.40% from the same period last year; deducting non-net profit was 144 million yuan, down 54.13% from the same period last year. 1) the sales of the main products of cement building materials increased compared with the same period last year. Q1 company East China cement product sales rebounded, product inventory decreased significantly; the southwest region new cement production capacity, cement product sales growth; northwest region cement sales stability, aggregate sales growth. 2) the decline in product prices leads to lower gross profit margin. The cost side of the company basically maintained stability in the first quarter, with sales prices falling in East China (76.81% of revenue in 2022) compared with the same period last year, resulting in a year-on-year decline in gross profit margin / net profit margin of 11.35% to 26.35% respectively. 3) the operating cash flow has decreased. Affected by the increase in advance payments for coal procurement and the increase in liquidity expenditure of new production subsidiaries, the net cash flow generated by the operating activities of Q1 company was 91.4079 million yuan, down 76.94% from the same period last year. The net cash flow generated by investment / fund-raising activities is-3.39 billion yuan respectively.

Real estate data pick up, infrastructure investment continues to improve, and market demand is expected to improve. Affected by multiple factors such as increasing downward pressure on the economy and the continued bottom of the real estate market in 2022, the cement industry as a whole was under pressure, with annual cement output of 2.13 billion tons, down 10.4 percent from the same period last year. The total profit of the cement industry is about 68 billion yuan, down about 60% from the same period last year. Looking forward to 2023, the effect of the policy increase in real estate is gradually emerging. The new housing and second-hand housing markets are hot in the first quarter. The real estate sales / construction / newly started / completed area in March changed respectively from the same period last year-3.5 picks up to 34.2 picks up. The data has picked up somewhat, and the market is expected to improve throughout the year. In terms of infrastructure, infrastructure investment increased by 10.8% from January to March compared with the same period last year, continuing the high growth trend last year, and is expected to become an important support for demand growth in the cement industry.

The steady progress of "one main body and two wings" will help the company continue to grow. While ploughing the main cement industry, the company continues to expand new business, and has made substantial progress. In 2022, the company's first batch of photovoltaic new energy projects were successfully completed and connected to the grid; the new economic equity focused on the steady promotion of the high-quality target of the light storage new energy and semiconductor industry chain. Hefei Jinghe application board listing has been smoothly passed and will soon be issued, and the fair value of Guangzhou Guangdong core project has increased by 49.9191 million yuan due to a new round of financing. In addition, the company announced a planned investment of 2.996 billion yuan for main business projects, resource allocation, product matching, asset matching, technological transformation and other supporting projects, new economy equity investment, photovoltaic power generation projects and environmental protection projects. The implementation of the investment plan will help to enhance the overall industrial scale of the company, expand the company's cement building materials business, and enhance the overall competitiveness. In the future, it will further enhance the company's revenue and profitability and thicken the company's profit level.

Investment advice: performance is under pressure in stages, be optimistic about long-term growth, and maintain an overweight rating. It is estimated that the company's net profit from 2023 to 2025 will reach 15.12,16.40 and 1.787 billion yuan respectively, an increase of 59%, 9% and 9% over the same period last year, corresponding to the PE valuation of 8, 7 and 7 times. The company continues to promote the "one main body and two wings" development strategy, cement building materials + aggregate environmental protection + investment three development lines steady and balanced development, the comprehensive competitiveness is further enhanced.

Risk hints: raw material price fluctuation risk; environmental protection policies (such as emission standards, capacity replacement ratio, off-peak production, etc.) may be repeated; industry competition intensifies, etc.