2023H1 Shangfeng Cement achieved revenue of 3.209 billion yuan, a decrease of 9.49%, and net profit of 531 million yuan, a decrease of 24.85%. Under the influence of conflicting supply and demand, cement prices declined markedly, and gross profit space in the main business was compressed, but the new economy investment business formed a certain level of performance support. Based on the profitability of the company's main business, which is still in the first tier of the industry, demand for cement is expected to stabilize under the “steady growth” policy. Considering the performance potential of the new business, the company was given 10xPE in 2023, with a target price of 10 yuan, and maintained a “buy” rating.

Performance was resilient, and gross profit rebounded in Q2. 2023H1 achieved revenue of 3.209 billion yuan, a decrease of 9.49%, net profit of 531 million yuan, a reduction of 24.85%, net profit of non-attributable net profit of 386 million yuan, a reduction of 50.26%. Non-recurring profit and loss mainly stemmed from the successful issuance and listing of the company's investment, which was successfully issued and listed during the reporting period to form a fair value change revenue of 197 million yuan. Looking at the split, the company's cement business achieved revenue of 2.115 billion yuan, same decrease of 3.07%, clinker business of 669 million yuan, same decrease of 8.80%, aggregate business of 219 million yuan, same decrease of 41.57%, concrete business of 77.83 million yuan, same decrease of 25.19%, environmental disposal business of 113 million yuan, same decrease of 12.20%. 2023H1 achieved a gross profit margin of 29.97%, a reduction of 8.00 pcts, and is in the first tier in the industry. Looking at Q2 alone, the company achieved revenue of 1,819 million yuan, same decrease of 11.28%, net profit of 359 million yuan, same decrease of 1.97%, gross margin of 32.43%, same decrease of 2.93 pcts, and a month-on-month increase of 6.08 pcts. The month-on-month gross margin recovery was mainly due to a significant drop in energy costs in the second quarter, increased sales volume, dilution of fixed costs, and a phased recovery in cement prices brought about by peak production.

Sales volume of clinker and cement rose and fell, and gross profit declined. 2023H1 sold 9.97 million tons of clinker and cement, up 18.69%, and sold 6.53 million tons of gravel and aggregate, down 16.69%. The average sales price of a total ton of clinker and cement was 279.3 yuan, a decrease of 19.55%. This is due to a decline in demand in the industry and a prominent contradiction between supply and demand. The average cost of cement per ton was 206.3 yuan, a reduction of 12.88%. On the one hand, coal prices fell significantly, and on the other hand, the company's energy efficiency continued to improve. From January to June 2023, the company's average clinker coal consumption fell by 0.5 kg/t-cl, and the incineration electricity consumption dropped 0.3 kW. The average gross profit per ton of aggregate for 2023H1 was 73 yuan, with a gross profit margin of 26.13%. 33.5 yuan, a year-on-year decrease of 53.29%, is mainly due to weakening downstream demand and an increase in the share of sales in the low-margin northwest region. The average cost per ton was 10 yuan, down 32.32% from the previous year. This is a scale effect brought about by the increase in aggregate production capacity. The average gross profit per ton was 23.6 yuan, and the gross margin remained at 70.29%.

The “One Wings, Two Wings” strategy continues to gain strength, and new businesses are expected to gradually release profits. While doing a good job in its main business, the company gradually expands the industrial chain extension business and moderately develops equity investment business in the new economy, forming a “one main, two wings” business pattern. In terms of industrial chain extension business, 2023H1's aggregate output is 6.53 million tons (with an annual production capacity of 18 million tons by the end of 2022), and the actual solid waste disposal volume is 135,700 tons (annual production capacity as of the end of 2022 is 570,000 tons). The extension of the industrial chain related business will resonate with the company's main business, develop collaboratively, and enhance overall profit stability. In the new economy investment business, the company mainly invests in the semiconductor and new energy materials sector. 2023H1's stock securities investment income and fair value change income reached 212 million yuan, which is 40% of the net profit attributed to the same period. Moreover, currently the company has 3 investment targets in the listing guidance stage, 1 company is in the listing application acceptance stage, and it is expected that investment income will be realized one after another, completing the transformation from main business support to backfeed the main business.

The industry is bottoming out, and policies are underpinning demand. Under the influence of weak demand, cement prices have shown an overall downward trend since Q2. Currently, the bottom of cement prices at the node has gradually been revealed. With the strengthening of the “steady growth” policy and the arrival of the traditional peak construction season, we expect the relationship between cement supply and demand to be stable, moderate and positive.

Risk factors: The growth rate of infrastructure investment falls short of expectations; the recovery of the real estate industry falls short of expectations; the risk of large fluctuations in demand; the price war in the cement industry continues; and the implementation of the company's new economy investment business falls short of expectations.

Profit forecast, valuation and rating: Considering that the cement industry is affected by weak downstream demand, the contradiction between supply and demand is prominent, and the overall decline in industry profits, we adjusted the company's 2023/24 EPS forecast to 1.07/1.19 yuan (the original forecast was 2.92/3.55 yuan), corresponding to 8.6/7.8 times PE, an additional EPS forecast of 1.31 yuan for 2025, and 7.1x PE for the current price. The average valuation of comparable companies (Hailuo Cement, Tianshan Co., Ltd., Huaxin Cement, China Resources Cement) is based on wind's unanimous expectation that the average valuation is 8-10 times. Considering that the company's main business profit is at an excellent level in the same industry, the extension of the industrial chain and investment business in the new economy will gradually release performance; at the same time, the performance of the main cement business is expected to benefit from the gradual stabilization of the steady growth policy, giving the company 10 times PE in 2023, corresponding to a target price of 10 yuan, maintaining a “buy” rating.