Q3 The declining prosperity of the cement and glass fiber business has dragged down the company's performance, and the industry boom is already at the bottom. Next year, the company's profit stability is expected to benefit from a low base and improved business structure, and the new materials and engineering technology services sectors are expected to mainly support the steady growth of the company's profits. Maintain a “buy” rating.

The company released its three-quarter report for 2023. From January to September 2023, the company achieved revenue of 159.58 billion yuan, a year-on-year decrease of 9.5%, and net profit of 2.35 billion yuan, a year-on-year decrease of 67.3%. Equivalent to 2023Q3, the company achieved revenue of 57.21 billion yuan, a year-on-year decrease of 11.2%, and net profit of the mother's net profit of 950 million yuan, a year-on-year decrease of 40.4%.

Q3 The decline in the prosperity of the company's cement and glass fiber business is dragging down performance, and the industry is already at the bottom. 2023Q3 The output of the cement industry fell 5.1% year on year, the imbalance between supply and demand worsened, and the cement coal price difference index fell below the 2015 level. The quarterly net profit of Tianshan Co., Ltd. was around the break-even line, and the tonnage profit of the cement industry once again returned to the bottom. Demand in the 2023Q3 glass fiber industry continues to be under pressure, and thick yarn prices are falling further. At present, glass fiber prices are below the bottom of the previous cycle, while the costs of raw materials, natural gas, and electricity are higher than in the past. We expect most domestic and foreign glass fiber thick yarn companies to be in a state of loss. Losses of individual companies are already close to cash costs, and operating pressure is increasing. At the same time, the new materials business other than glass fiber, such as gypsum board, waterproofing, and lithium film, and the engineering technology service business performed well in Q3, which provided some support for overall profit. Beixin Building Materials Q3 net profit increased 22.5% year on year, and Sinoma International's Q3 net profit increased 23.4% year on year (not on the same scale).

Next year, the company's profit stability is expected to benefit from a low base and improved business structure. Looking at next year, there is limited room for further decline in the company's cement and glass fiber profits from a low base. On this basis, it is recommended to wait for the demand side to pick up and the production capacity of the supply side industry to be cleared and integrated. Moreover, since this year, the company's basic building materials sector's share of profits has declined further, and the impact of fluctuations on the company's overall profit has decreased markedly. In the future, the new materials and engineering technology services sectors are expected to mainly support the steady growth of the company's profits.

Risk factors: Demand and price stability in the cement industry are not as stable as expected, leading to large fluctuations in the cement business; non-cement business development falls short of expectations; the scale of impairment of company assets has increased dramatically; the company's capital expenditure is too large or not as effective as expected; industry competition has intensified.

Profit forecast, valuation and rating: 2023Q3 The decline in cement and glass fiber prosperity has dragged down the company's performance, and industry profits are already at the bottom. Next year, the company's profit stability is expected to benefit from a low base and improved business structure, and the new materials and engineering technology services sectors are expected to mainly support the steady growth of the company's profits. Considering that the prosperity of the Q3 cement, glass fiber and other industries fell short of expectations, we adjusted the company's net profit forecast for 2023-2025 to 33.80/47.02/5.971 billion yuan (the original forecast was 63.84/82.69/10.338 billion). According to the company's PE valuation center 6x in the past five years, we gave a target price of HK$4 for 2024. Maintain a “buy” rating.