3Q23 results slightly miss our expectations
Shangfeng Cement announced its 1-3Q23 results: Revenue fell 5.5% YoY to Rmb4.88bn, and attributable net profit dropped 17.2% YoY to Rmb701mn. In 3Q23, revenue rose 3.1% YoY to Rmb1.67bn, and attributable net profit grew 21.6% YoY to Rmb169mn. The firm's 3Q23 results slightly miss our expectations, mainly due to heavier-than-expected pressure on its per-tonne ASP and per-tonne earnings.
Sales volume continued to increase; revenue from main business ramped up steadily. Over January-September, the firm's cement and clinker sales volume rose 1.68mnt or 12% YoY to 15.84mnt, and its main business grew steadily as production and sales volume of its newly operated subsidiary in southwestern China increased.
Expansion along the value chain for aggregate business well on track. Over January-September, sales volume of sand and gravel aggregate fell 2.05mnt YoY to 10.49mnt, which we attribute to weak market demand. In terms of environmental protection business, the firm's actual treatment volume over January-September was 210,400t, and its revenue rose 10.9% YoY to Rmb173mn.
Due to weak market demand and intense competition, the firm's cement prices have fallen sharply, and its earnings per tonne may remain higher than peers though under pressure. In 1-3Q23, the firm's cement ASP fell 16.59% YoY and its clinker ASP dropped 19.58% YoY. Data from Digital Cement shows that cement ASP in the Yangtze River Delta and southwestern China fell 16% and 12% QoQ in 3Q23. We think that the QoQ decline in price per tonne of the firm's cement products in 3Q23 may be larger than the decline in its cost per tonne to some degree. We estimate that its gross profit dropped QoQ to Rmb50-60/t in 3Q23 but was still higher than peers, indicating strong earnings resilience.
Trends to watch
Cement prices in core regions recovering; main business to recover mildly. Data from Digital Cement shows that cement prices in the Yangtze River Delta and southwestern China have recovered in the past 2-3 weeks. Given rising coal prices, we expect the firm's gross profit per tonne to recover slightly in 4Q23. We expect the firm's main business to recover mildly in 2024, as the workload of physical infrastructure projects is likely to increase and market competition may stabilize.
Value chain expansion to boost efficiency. Output and sales volume of the firm's aggregate fell YoY in 1-3Q23 due to weak demand, but we believe the firm will maintain sound profitability and stable earnings, given its strategy of steadily developing aggregate business on the back of its own cement mines. At present, the firm' co-treatment of cement kilns and construction of solar energy storage projects is well on track. We expect its gains from and efficiency of value chain expansion to improve.
Financials and valuation
As we lower our assumption on the firm's earnings per tonne, we cut our 2023 and 2024 attributable net profit forecasts 19.2% and 29.1% to Rmb850mn and Rmb910mn. The stock is trading at 10x 2023e and 9x 2024e P/E. We maintain an OUTPERFORM rating. Considering that the industry will likely recover moderately, we only cut our target price 10% to Rmb11.3, implying 13x 2023e and 12x 2024e P/E, offering 33% upside.
Risks
Disappointing demand recovery; sharper-than-expected cost expansion.