Results were lower than expected, and profit changed from profit to loss in 4Q23 due to impairment provisions

In 2023, Wan Nianqing achieved net profit attributable to the parent company of 230 million yuan, or -41% year-on-year, lower than our expectations (680 million yuan), mainly due to: the restoration of cement market prices in 1.4Q23 was weaker than expected; and 2.

The provision for impairment was higher than anticipated. Due to the concentration of depreciation provisions in 4Q23 (150 million yuan, accounting for 94% of the year), 4Q23 net profit to mother was -80.28 million yuan, which changed from profit to loss over the previous month. Considering the lower cement sales volume and gross profit per ton assumption, we reduced the company's 2024/2025 EPS by 74.2%/74.0% to 0.36/0.38 yuan, and forecast an EPS of 0.39 yuan in 2026. The target price was reduced by 18.2% to 7.13 yuan, based on 0.79x2024 P/B (2024 BVPS: 9.03 yuan), which is one standard deviation lower than the company's average P/B since 2015 to reflect industry demand or the prospect of peaking. The company achieved results in focusing on its main business and expanding its share in 2023. We expect that improving the quality and efficiency of operations will help the company better meet market challenges. Maintain an “increase in holdings.”

Cement expands share, commercial mixing stabilizes benefits

In 2023, the company's cement sales performance was superior to the market, and the increase in share achieved results. Annual cement clinker sales volume was 24.49 million tons, -1.0% year on year; cement production in Jiangxi Province was -3.9% year-on-year during the same period. Gross profit per ton was -16 yuan/ton (-34.6%) to 30 yuan/ton year on year, which is the main reason why the company's net profit to mother fell significantly year on year.

The company's mixed business maintained steady growth in 2023, with sales volume +4.3% year-on-year to 6.36 million square meters. Although the price was -50 yuan/square (-11.9%) to 378 yuan/square meter (-11.9%) year-on-year, thanks to falling costs, single-party gross profit was +1 yuan/square (+0.8%) compared to 95 yuan/square meter, and the gross profit of the mixed business in 2023 already accounted for 40% of the company (2022:29%). In 2023, aggregate business revenue was -6.7% YoY to $330 million, and gross margin was -11.7pct YoY to 31.9%.

The trade business contracted, controlling capital expenses, and the balance sheet was still strong. In 2023, the company further focused on its main business. Revenue from the trade business fell -97.3% year on year to 45.3 million yuan, accounting for 0.5% of the company's total revenue (2022:14.9%). We believe this will help the company reduce its use of working capital and improve operating cash flow. At the end of 2023, the company's accounts receivable and notes totaled $2.19 billion, -8.0% year-on-year. Operating cash flow was -9.7% YoY to $760 million, which was significantly less than the decline in net profit. The company's capital expenditure contracted in 2023, and investment cash flow - $420 million, -69.9% year over year.

Thanks to stricter controls on capital use, the company still held $1.37 billion in net cash after deducting interest-bearing debt at the end of 2023, and its balance sheet remains strong.

The relationship between supply and demand in the industry is still under pressure. Improving the quality and effectiveness of operations to meet market challenges. Against the backdrop of a recovery in real estate sales still to be seen and infrastructure investment growth slowing, we expect the supply and demand relationship in the cement industry to remain under pressure in 2024. In this context, the company's continued improvement of operational quality and efficiency may become the key to meeting market challenges and stabilizing operating efficiency. We are optimistic that the company will improve the quality of operations by reducing costs and controlling costs and improving quality and efficiency, and consolidate its leading position as one of the leading enterprises in the regional market.

Risk warning: Real estate sales recovery is slower than expected, and production execution at wrong peak is weaker than expected.