The 75% YoY fall in CNBM's 1H23 earnings was largely in line with its earnings warning. The acute deterioration of profits of its cement business and glass fibre operations were the culprits. However, the company's profitability actually improved a lot in 2Q23. Assuming the improved profitability can last, we expect its earnings to jump 2.9x HoH in 2H23. We cut our 2023-25 earnings forecasts by 23-40% after post- results adjustments. Despite this, we reiterate our BUY call given its low valuations with target price reduced to HK$5.46.
Key Factors for Rating
CNBM's net profit plummeted 75% YoY to RMB1.4bn in 1H23. The sharp fall in earnings was mainly caused by the 109% YoY decline in net profit of its basic building materials segment to a net loss of RMB262m in 1H23 as its unit gross profit of cement and clinker dropped 40% YoY to RMB38/tonne. The net profit of its new materials segment also dropped 36% YoY to RMB1.9bn in 1H23 as the price of glass fibre dropped on weak demand.
However, the company's profit actually improved substantially in 2Q23 as the unit gross profit per tonne of cement and clinker improved. It posted a net profit of RMB2.2bn in 2Q23 under CAS, recovered from a net loss of RMB528m in 1Q23.
We expect its earnings to jump 2.9x HoH in 2H23. We first assume the improved unit gross profit of its basic material segment will last. In addition, we should see higher sales volume for gypsum board, lithium battery separators and wind power blades with new capacities for the first two start to contribute.
In view of the poor 1H23 earnings, we slash our 2023-25 earnings forecasts by 23-40%. Despite this, the company's shares look attractive at 5.7x 2023E earnings and 7.1% 2023E dividend yield.
Key Risks for Rating
Improved margin for cement business in 2Q23 cannot last.
Lower-than-expected profit for the new materials segment.
Valuation
We slash our target price from HK$9.62 to HK$5.46. On top of the cuts in our earnings forecasts, we also lower our target valuation from the average of 7x 2023E P/E and 0.72x 2023E P/E to the average of 6x 2023E P/E and 0.5x 2023E P/E in view of its lower earnings and ROE.
