The company released its annual report for 2022 on April 14. The company achieved annual revenue of 11.282 billion yuan, a year-round decrease of 20.58%; net profit of 388 million yuan, a decrease of 75.64%, and net profit due to mother fell below the range of 456-587 million yuan in the performance forecast. Earnings per share were $0.49, and dividends were $0.26 per share. Considering that demand in the cement industry is expected to remain flat this year, cement companies' willingness to maintain profits has increased on the basis of last year's price war, industry collaboration is expected to increase efficiency. The East China region where the company is mainly operated still has a comparative advantage in the national pattern, so we maintain the company's purchase rating.

Key points to support ratings

The performance fell short of the forecast level, mainly due to non-recurring profit and loss items. The company released its 2022 annual report on April 14. The company achieved annual revenue of 11.282 billion yuan, a year-round decrease of 20.6%, and net profit of 388 million yuan, a decrease of 75.6%. The company's net profit declined a lot. The main reason for falling short of the performance forecast was a net loss of 97 million yuan from changes in fair value, 123 million yuan in asset impairment losses, and a loss of 89 million yuan in credit impairment. The three items totaled 309 million yuan, which was large-scale. The three losses in the fourth quarter alone totaled 239 million yuan. In addition, the company calculated 132 million yuan in remuneration for employees awaiting employment in the fourth quarter, which led to a significant increase in management expenses. After deducting three losses and large management expenses, we expect the profit level to be slightly higher than the performance forecast. Considering that the impact of impairment is unsustainable, we are confident that the company's performance will recover in 2023.

Volume and price have dropped sharply, costs have risen, and profit margins have declined a lot. According to the company's annual report, in 2022, the company achieved sales volume of 24.744 million tons of cement and clinker, a decrease of 10.6%. We estimated that the company's annual average price of cement and clinker was 256.0 yuan/ton, down 46.0 yuan/ton; tonnage cost was 209.8 yuan/ton, up 12.9 yuan/ton; we estimated gross profit per ton of 46.2 yuan/ton, same decrease of 58.9 yuan/ton; ton cost of 24.5 yuan/ton, up 5.6 yuan/ton; net profit of 14.3 yuan/ton, same drop of 51.8 yuan/ton. The gross profit margin for cement and clinker was 18.04%, down 16.75 pct from the previous year. The company's concrete business revenue was 2,612 million yuan, down 9.1% year on year; sales volume was 6.099 million square meters, down 2.6% year on year; gross profit margin was 22.0%, down 6.2 pct year on year. Overall, the company's demand declined and costs rose in 2022. It also faced an industry price war, and its performance declined a lot under pressure.

The 2023 pattern is expected to be optimized, and the company's location advantage may be outstanding. We expect demand in the cement industry to be basically the same year on year in 2023, and costs are expected to drop steadily slightly. We expect that after the lessons of the price war in the second half of 2022, cement companies will pay more attention to industry collaboration this year, industry rigidity and peaks are expected to increase, and price resilience may be higher than in previous years. Combined with the company's own grasp of the core regional market in and around Jiangxi, and further expanding the cement industry chain with building materials products such as commercial compounds, aggregates, and new wall materials to enhance its competitive advantage, the company's performance is expected to rise steadily.

valuations

Considering that the company's performance falls short of the forecast level, mainly due to non-recurring profit and loss, and the impact is unsustainable, we basically maintain the company's original profit forecast. The company is expected to achieve revenue of 136.39, 147.15, and 15.879 billion yuan in 2023-2025; net profit of 833, 9.82, and 1,142 million yuan; earnings per share of 1.04, 1.23, and 1.43 yuan respectively, corresponding to price-earnings ratios of 8.6, 7.3, and 6.3 times.

The main risks faced by ratings

Coal prices have risen, demand for cement has declined, and the pattern has worsened.