2023Q1, the company achieved revenue of 22.379 billion yuan, a year-on-year decrease of 20.83%; net profit after deducting non-return to the mother was 1,427 million yuan, a year-on-year decrease of 258.04%. The year-on-year revenue growth rate was dragged down by a high price base, and the month-on-month increase in non-profit losses after deducting non-profit losses was mainly affected by seasonal factors. We estimate that the quarterly average price difference between cement and coal has rebounded month-on-month. The company is at the bottom of both profit and valuation, and we are optimistic about the quarterly improvement in the year-on-year growth rate of the company's profit. Maintain a “buy” rating.

Matters: The company published the first quarter report of 2023. 2023Q1, the company achieved revenue of 22.379 billion yuan, a year-on-year decrease of 20.83%; net profit of the mother was 1,231 million yuan, a decrease of 220.08% from the previous year; net profit after deducting the net profit of the non-return mother was 1,427 million yuan, a decrease of 258.04% over the previous year.

Revenue: The year-on-year growth rate was mainly dragged down by a high price base. 2023Q1's revenue fell 20.83% year over year, mainly due to the high price base for the same period last year. Judging from the industry situation, according to Wind, the average price of 2023Q1 national PO42.5 bulk cement fell 17% year on year, and national cement production increased 4% year on year. Recently, demand, as measured by the operating rate of cement grinding plants, is slightly better than the same period last year. Although rising industry inventories put some pressure on prices, considering that coal costs have also declined, unit gross profit may be relatively stable.

Profit: The month-on-month increase in non-profit losses after deducting non-profit losses was mainly affected by seasonal factors. We estimate that the quarterly average price difference between cement and coal has rebounded month-on-month. The net profit loss of 2023Q1 companies after deducting non-return to the parent increased compared to 2022 Q4, mainly due to the influence of seasonal factors. The scale effect of traditional off-season companies in Q1 weakened, resulting in a 4.05 pcts month-on-month decline in gross margin and an increase of 2.30 pcts in the period expense ratio. We estimate that the national cement and coal price difference in 2023Q1 increased month-on-month compared to 2022Q4, and the year-on-year decline has shown a gradual narrowing trend since this year. Excluding the influence of seasonal factors, we still maintain the judgment that last year's Q4 was the bottom of the company's performance.

The company is at the bottom of both profit and valuation, and is optimistic about the quarterly improvement in the year-on-year profit growth rate. The company is the largest cement leader in the world, with a complete industrial chain and a national layout. It is the main operator of the basic building materials business in China. There is a high degree of certainty that demand and profits in the cement industry will recover from the bottom this year. The elasticity of profit recovery depends on the extent to which coal costs fall and demand recovers. It is expected that in the long run, opportunities for the industry to break down will still come from supply-side reforms, including measures such as the withdrawal of inefficient production capacity under the dual carbon policy and the restructuring of leading enterprises. We believe that the company is at the bottom of both profit and valuation. On the basis of industry recovery, it drives its own growth by reducing costs and developing aggregates, and is expected to further optimize the incentive mechanism along with the deepening of state-owned enterprise reforms.

Risk factors: The recovery in demand for housing and infrastructure construction is weak; the cement industry's self-discipline falls short of expectations; the company's non-cement business layout falls short of expectations; and the company's asset impairment losses have exceeded expectations.

Profit Forecast, Valuation and Rating: We maintain our 2023-2025 profit forecast. If we consider the impact that China Building Materials, the majority shareholder in 2023, may have to fulfill the 2021-2023 performance compensation promise, we forecast that the net profit of Fumo in 2023-2025 will be 186.20/92.05/11.796 billion yuan; excluding the impact of possible China Building Materials performance compensation promises, we forecast Fumo's net profit of 2023-2025 to be 7.239/9134/11.745 billion yuan. Considering that 1xPB is one of the important benchmarks for measuring the valuation of an enterprise, and is lower than the company's valuation center of 1.4XPB in the past three years, we gave the company 1xPB in 2023, maintaining the target price of 11 yuan, and maintaining the “buy” rating.