3Q23 performance is in line with our expectations
The company announced 1-3Q23 results: revenue of HK $17.89 billion, year-on-year-26.1%, net profit of HK $710 million, year-on-year-61.3%; of which 3Q23 revenue of HK $5.72 billion, year-on-year-29.2%, net profit of HK $89.26 million, + 171.1%. The company's 3Q23 performance is in line with our expectations.
1) downstream demand is weak and sales are under pressure. 1-3Q23 cement clinker sales of about 47.34 million tons, year-on-year-14.5%, of which 3Q23 sales of 17.79 million tons, year-on-year-21.4%, the decline than 2Q23 (- 12.2%) further expanded. 2) the price competition in the industry is fierce, and the average sales price drops sharply to suppress the profit of tons. The average price of cement clinker of 1-3Q23 company is 322 Hong Kong dollars,-41 Hong Kong dollars (- 11.2%) compared with the same period last year, of which the average price of 3Q23 cement clinker is 268 Hong Kong dollars,-35 Hong Kong dollars (- 11.5%).
We calculate the gross profit of 1-3Q23 cement clinker tons of the company 45 Hong Kong dollars, year-on-year-15 Hong Kong dollars, of which 3Q23 cement clinker tons gross margin of 22 Hong Kong dollars, year-on-year + 6 Hong Kong dollars / month ratio-49 Hong Kong dollars. 3) the cost of tons is higher than the same period last year. We calculate that the cost of 3Q23 cement clinker ton is about HK $40, which is + HK $7 compared with the same period last year. 4) the cash balance decreased month-on-month, and the borrowing rate declined slightly. As of the end of 3Q23, the company had a cash balance of HK $2.74 billion, a decrease of HK $600 million compared with the end of 1H23. The company's loan rate at the end of 3Q23 is 39.8%, which is lower than that of 41.2% at the end of 1H23. We believe that the company's financial leverage as a whole is still relatively sound.
Trend of development
Cement in the core business area is being re-priced, and 4Q23 profit is expected to be marginal repaired. We believe that the company's 3Q23 performance is affected by the substantial decline in South China cement prices in the core business region. According to Digital cement Network, South China cement prices began to rise in mid-October, and we expect 4Q23's cement ton gross margin to be moderately repaired and the contribution of superimposed aggregate projects to increase, which is expected to promote 4Q23 performance improvement on a month-on-month basis.
Aggregate business production and sales volume is expected to contribute to incremental profits. 3Q23's other income is + HK $83.51 million year-on-year, which we expect to be mainly due to aggregate production and sales. According to the company's mid-2023 report, by the end of 1H23, the company's annual aggregate production capacity is 83.4 million tons. With the aggregate projects to be built and under construction, the potential annual production capacity is about 146 million tons. We believe that with the production and sales volume of the company's aggregate business, and promoting the integrated operation of cement, aggregate and business in the industrial chain, it is expected to release considerable incremental profits.
Profit forecast and valuation
As a result of the downward revision of the ton profit assumption, we reduced the company's net profit of 2023 13.9x/11.1x 24e by 37.8% to HK $960 million / 1.2 billion, compared with the current share price of 2023max 24e. We maintain our outperform industry rating, lowering our target price by 33.3% to HK $2.67, corresponding to 2023/24E19.4x/15.5x Pamp E, which implies 40% upside.
Risk
Demand recovery is not as expected and aggregate performance growth is not as expected.