1H23 performance fell short of our expectations
The company announced 1H23 results: revenue of 14.49 billion yuan, -14% year-on-year, net profit of -369 million yuan, -132% of the same period; of these, 2Q23 revenue was 9.30 billion yuan, -22%, and net profit of 423 million yuan, or -69% of the same period.
1) Sales volume increased markedly year on year, mainly due to the low base. 1H23 sold 43.96 million tons of cement clinker, +14.4% year-on-year. We think this is mainly due to the low sales base for the same period last year. The company's 1H23 sales volume was basically comparable to the average for the same period in 2018-2021, and the overall sales performance was stable. 2) Price competition in the industry is fierce, and the average price per ton is clearly under pressure year on year. Due to the slow recovery in demand overall, the contradiction between supply and demand in the industry has been revealed, and prices in North China and other regions have declined deeply. The average price of cement clinker for 1H23 is about 281 yuan/ton, compared to -84 yuan/ton. 3) The downturn on the cost side had a positive impact, and the decline in gross profit per ton was narrower than the average price per ton. We calculated that the average price of 1H23 thermal coal dropped by more than 150 yuan/ton year on year. We think it brought about a certain decrease in the company's tonnage cost. Combined, 1H23's sales volume increased markedly year on year, and the related cost dilution effect increased. We calculated that 1H23's gross profit per ton of cement clinker was 30 yuan, or -54 yuan year on year.
4) Expense rates have increased, further suppressing net interest rates. 1H23's sales/management/financial expense ratio was 1.7%/13.0%/2.1%, compared with the previous year, +0.2/+1.7/+0.1ppt. The slight increase in the expense ratio further suppressed profit performance. 5) The aggregate business is steadily expanding, and the environmental disposal business is under pressure. 1H23 sold 15.95 million tons of aggregate, +15.4% year on year, gross profit margin of 48%, down 7.3ppt year on year, but remained at a high level. In terms of hazardous waste and solid waste disposal business, 1H23 had revenue of 476 million yuan, -24% year on year, gross margin of about 29.3%, and -3.3ppt year on year. Overall, there was some pressure. 6) Net operating cash flow remains high. 1H23's net operating cash flow was 999 million yuan, +21.5% year-on-year, and the revenue collection situation was good.
Development trends
North China has a stable leading position and is expected to benefit from a rise in industry prosperity. In the first half of the year, the company's tonnage profit was clearly under pressure due to slow demand recovery and intense industry price competition, but we believe that the company's layout and market share advantage in North China are still stable. As the real estate boom is expected to bottom up in the future, and progress in infrastructure projects is expected to accelerate. We believe that the industry boom in the company's core business area is expected to pick up, and the company is also expected to usher in a certain volume, price and profit recovery.
Profit forecasting and valuation
Due to weak industry demand, the decline in the company's tonnage profit exceeded expectations. We lowered the company's unit profit assumption. We lowered the company's gross profit forecast for 2023/24E by 59%/19% to 501/1.22 billion yuan. The current stock price corresponds to 2023/24E 40x/17x P/E. We maintain an outperforming industry rating. Considering that the industry sentiment is expected to gradually recover and that the company has plenty of room to repair its profit, we maintain a target price of 9.9 yuan, corresponding to 2024E 22x P/E, which implies 27% upside.
risks
The recovery in demand fell short of expectations, and competition in the industry intensified.