2023H1 China Resources Cement achieved revenue of HK$12.737 billion, a decrease of 23.72%, and net profit of HK$621 million, a decrease of 65.59%. The decline in revenue performance was due to price declines caused by conflicting supply and demand for cement. Q2's profit decline narrowed markedly under the backdrop of falling coal costs. Considering the company's leading position in the South China region, its early layout in terms of carbon emissions, and the expectation that cement prices in the South China region will stabilize in the second half of the year, the company was given 15x PE in 2023, corresponding to a target share price of HK$3, maintaining a “buy” rating.

Revenue and performance declined in the first half of the year, and Q2 improved markedly from month to month. 2023H1 achieved revenue of HK$12.737 billion, a year-on-year decrease of 23.72%, and net profit to parent of HK$621 million, a year-on-year decrease of 65.59%. Looking at the breakdown, during the reporting period, the company's cement business revenue was HK$10.186 billion, a decrease of 18.24%, the same decrease of 18.24%, the same revenue of the clinker business was HK$311 million, the same decrease of 39.42%, and the concrete business achieved revenue of HK$1,675 million, a decrease of 41.61%. The decline in downstream demand compounded by overcapacity in the South China region seriously led to a sharp drop in volume and price. During the reporting period, the company's cement/clinker/concrete sales volume was 285.21 million tons/1,023,000 tons/3.83 million cubic meters, down 7.0%/49.9%/29.5% year on year. Unit sales prices were HK$357.1 per ton, HK$304.3 per ton, and HK$440.5 per cubic meter, respectively, down 12.09%/21.35%/17.21%. Looking at a single quarter, Q2 achieved revenue of HK$7.252 billion, a similar decrease of 22.24%, and net profit of 658 million HK$658 million, a reduction of 38.79%. The decline narrowed compared to Q1. This means that demand for cement in South China declined during the same period last year, supply increased, and cement prices and profits showed a trend of back and forth. In addition, thermal coal prices have continued to decline since the first half of this year, leading to a gradual decrease in year-on-year pressure.

Profit space for cement has declined, and falling coal prices have underpinned costs. The gross margin of 2023H1 was 15.63%, down 4.86 pcts from the previous year. Specifically, the gross margin of cement/clinker/concrete was 16.7%/7.7%/10.4%, respectively, a year-on-year decline of 5.3/14.1/3.4 pcts. This is due to the fact that the decline in cement prices was greater than the decrease in cost. Specifically, the share of coal/electricity/materials/other costs in cement production was 43.8%/12.3%/18.3%/25.6%, respectively. Of these, the cost of tonnes of clinker coal was HK$154.5, down 6.0% from the previous year. The change in coal costs was based on the fact that the company still used a high proportion of Changxie coal in the same period last year. The coal price has continued to decline since the first half of this year. The average price of coal mining by 2023H1 was HK$1,152 per ton, a year-on-year decrease of 1.2%; 2) The company continued to improve energy efficiency during the reporting period, tons Standard coal consumption for clinker was 99.5 kg, a decrease of 4.3 kg over the previous year.

The continuous release of aggregate production capacity is expected to accelerate the formation of performance support. By the end of 2023H1, the company's aggregate production capacity reached 86.5 million tons, reaching 54% of the planned production capacity, an increase of 35 million tons over the beginning of the period. The average sales price of the company's aggregate in the first half of the year was HK$40 per ton, of which the average price in Guangdong was HK$61.5 per ton, the average price in Guangxi was HK$34 per ton, and the gross margin was 40%-50%. We expect the company's annual aggregate sales volume to be around 10 million tons. Subsequently, as the company's aggregate production capacity gradually penetrates into the market, it is expected to form more support for performance.

Cement prices in South China are expected to bottom out in the second half of the year, and the company is expected to benefit from Guangdong's advanced carbon trading. The South China region, especially Guangxi, was previously impacted by the replacement of external production capacity, and the supply pattern deteriorated. Currently, the additional production capacity in Guangxi has basically disappeared, and the rebalancing of regional supply and demand is underway. Cement prices in the entire South China region are expected to bottom out in Q4 with the support of gold, nine banks, and ten banks. The Guangdong Department of Ecology and Environment launched the “Guangdong Carbon Trading Support Carbon Peak and Carbon Neutrality Implementation Plan (2023-2030)” in August. It is the first policy in China to propose “carbon trading supports double carbon”. It clearly states that the scope of carbon trading should be expanded. As the cement industry is subsequently incorporated into the carbon trading market, the company, as a leading cement enterprise in South China, has already made an advance layout in terms of carbon emissions, and is expected to benefit from this round of supply-side optimization.

Risk factors: macroeconomic pressure; aggregate production capacity released less than expected; real estate demand released less than expected; rebalancing supply and demand in the cement industry fell short of expectations.

Profit forecast, valuation and rating: Taking into account factors such as downstream demand pressure for cement, high supply-side competitive pressure in East China, and obvious downward trend in cement prices, etc., we adjusted the company's EPS forecast for 2023-2024 to HK$0.20/0.25 (HK$0.86/1.01), adding the 2025 EPS forecast to HK$0.31. The current price corresponds to the 2023 PE of 13.2/10.6/8.5x. Based on Wind's unanimous expectations, referring to comparable companies (Hailuo Cement, Tianshan Co., Ltd., Huaxin Cement), the 2023 PE range is 8-15x. At the same time, the company also operates an aggregate business. Considering the increasing scarcity of mining resources, referring to the overseas aggregate listed company Vulcan Materials Bloomberg, unanimously expects the 2023 PE valuation level to be around 40x. Combined with the company's leading position in South China, the advance layout in terms of carbon emissions, and cement prices in the South China region are expected to stabilize in the second half of the year, giving the company 15x PE in 2023 , corresponding to the target stock price of HK$3, maintaining the “buy” rating.