Investment advice
We believe that against the backdrop of declining industry sentiment, the company has scarce integration+overseas business layout advantages within the sector, and is expected to achieve current profit resilience and medium-term growth. The profit safety margin is deep, and the 2024E dividend yield is about 4.2%; moreover, domestic profits are currently at the bottom. If there is catalysis on the demand side, the potential profit elasticity is quite impressive. At present, the company has both offensive and defensive attributes.
rationales
The integrated layout brings competitive advantages, and the aggregate business still has room for growth. The company established an integrated development strategy earlier and invested heavily in the layout of aggregate resources, concrete and environmental protection businesses. As of mid-2023, it has built an annual aggregate production capacity of 240 million tons, and most of them are located in advantageous locations along the river. Close to resources and golden waterways, the competitive advantages on the cost side and sales side are outstanding. 1H23's non-cement business accounts for 56% of net profit to mother, which already accounts for half of the profit. We believe that the company's integrated layout is expected to strengthen the competitive advantage of the industrial chain and help withstand the downward pressure of industry demand. At the same time, with the release of the company's aggregate production and sales volume and the opening up of space for cost reduction, the company's non-cement business, led by aggregates, is expected to continue to contribute incremental profits in the future, helping the company turn its leading capital expenditure into rich returns.
Overseas, it has a first-mover advantage, and the benefits are expected to rise. The company is one of the pioneers of domestic cement companies going overseas. Currently, it has deployed about 22 million tons of cement grinding production capacity in many overseas countries, and most of it is located in regions with a stable market pattern and relatively strong demand. Overseas single ton profits are abundant, forming a good complement to the declining domestic cement profits. The company has now established an overseas development strategy centered on mergers and acquisitions, and strives to maximize its management and technical advantages, control the impact on the supply and demand pattern of the local market to the greatest extent possible, and maintain the competitiveness and profitability of local factories. We believe that the company's overseas layout has a first-mover advantage. Although efficiency may decline in some regions in 2024 due to supply and demand disturbances, the overall benefits of the overseas business are still expected to rise as the company's overseas production capacity expands and production and sales increase.
The domestic market position is stable and has potential profit elasticity. The company has obvious scale advantages in central and southwest China, and has a strong ability to radiate the East China market, and its position in the domestic market is relatively stable. The company attaches importance to technical improvement, carbon reduction, and consumption reduction, and vigorously promotes the layout of alternative fuel and environmental protection businesses. The combined heat replacement rate of the 1H23 kiln line exceeds 22%, leading the energy efficiency in the industry. We believe that the supply and demand side of the industry may still be under pressure in 2024, and the company's domestic cement business profit may still be low; however, in the medium term, if the industry's supply and demand adjustments are completed and the industry moves towards a steady recovery in prices, the company's core position is expected to regain opportunities to increase, and the company's current low domestic cement ton profit suggests considerable room for flexibility.
Profit forecasting and valuation
We kept 2023E net profit unchanged. Due to lowering the profit assumption of 24E cement tons and increasing the profit assumption of 25E aggregate tons, we down/raised 2024/25E net profit by 4.7%/8.0% to 3.07 billion yuan/3.51 billion yuan. The current stock price corresponds to 2024/25E 9x/8x P/E. We maintain our outperforming industry rating and target price of 21.2 yuan, corresponding to 2024/25E 14x/13x P/E, implying 52% upward space.
risks
Overseas cement prices fluctuated beyond expectations, domestic cement prices fell sharply, and aggregate production and sales fell short of expectations.