Company profile: A long-standing and established cement faucet. The company, formerly known as the Hubei cement factory established in 1907, has a rich historical heritage. The company has a foreign+state-owned compound shareholder background and has a good governance structure; President Dr. Li Yeqing has been at the helm of the company for 25 years and has rich management experience. The compound growth rate of the company's revenue/net profit from 2007 to 2022 was 13.2%/16.0%, respectively, with outstanding historical performance. In recent years, the company's integrated business/overseas layout has accelerated, and the profit center at the bottom of the industry cycle has risen markedly.
Aggregates: Resource attributes create stronger barriers to competition. Aggregates have the same origin as cement demand, but due to shorter product delivery distances, lower product values, and regional mismatches between supply and demand, the aggregate industry's resource attributes are superior to cement. We believe that the aggregate industry has a good business model. Although current demand is still bottoming out, it is expected that leading companies will have limited room for profit decline. On the one hand, small and medium-sized mines are still being cleared under strong policies, and the trend of increasing industry concentration has not changed; on the other hand, new construction projects need to balance the current rationality of mining from the perspective of internal rate of return. The premium rate for new mining rights across the country declined in 2023. Currently, corporate mineral rights auctions tend to be rational, and the side effect is that mining revenue may have weakened. Furthermore, high-quality mining resources along the river are scarce, and leading companies in the industry have a remarkable first-mover advantage.
The company's vertical integration strategy layout is relatively early, and the aggregate business is more flexible. As of 2023H1, the company's aggregate business accounted for more than 20% of gross profit, and the non-cement business accounted for more than 50% of the overall EBITDA contribution.
2023H1 has an annual aggregate production capacity of 241 million tons, and production capacity is mainly concentrated in the Edong region, which is rich in resources and excellent water transportation conditions; in addition, we estimate that the company's total existing and proposed production capacity in the Yangxin and Wuxue riverside regions exceeds 160 million tons/year, accounting for more than 40% of the local 2025 production capacity plan. We believe that as our own mines are put into operation one after another, the profitability of the company's aggregate business is expected to be fully released, and it is also expected to further promote the rapid expansion and continuous cost reduction of the concrete business.
The overseas cement market space is vast. Currently, the cement industry in emerging markets is still a blue ocean. The strategic contraction of international cement giants in the cement sector has also created opportunities for domestic companies to go overseas, and the overseas market is vast. The company has been deeply involved overseas for more than ten years: over the past ten years, the company has successively built or operated a number of large-scale cement plants and related industrial chain enterprises in 11 countries including Central Asia, Southeast Asia, South Asia, Africa, and the Middle East. The overseas layout is scattered, and the profit contribution is substantial. In 2022, the company's overseas EBITDA exceeded 1.4 billion yuan, accounting for 19.4% of the total. Based on the strategic contraction of international giants, and the company's rich overseas experience and good reputation, we expect that the company's further mergers and acquisitions to increase production capacity are likely events, and the company's contribution to overseas performance is expected to further increase.
Domestic cement profits are bottoming out, and the company's regional advantages are still prominent. Currently, domestic cement companies' profits have reached the bottom. The industry's profit for 2023 is expected to be 32 billion yuan, down more than 50% from 2022, which is lower than the historical bottom in 2015; the company is the leader in the Lianghu/Southwest region, and the production capacity/raw material supply capacity still has a strong competitive advantage. Furthermore, the company pioneered the deployment of carbon reduction technology in China, and currently leads the entire industry in carbon emissions and energy consumption indicators. We expect that after the cement industry is incorporated into the carbon trading market, the carbon reduction advantages of industry leaders will be transformed into cost advantages, and the company's cost advantage is expected to be further demonstrated.
Investment advice: In recent years, the company's integrated business/overseas layout has accelerated, and the profit center at the bottom of the industry cycle has risen markedly. We expect the company's net profit to be 25.46/29.98/3.398 billion yuan respectively in 2023-2025, corresponding to EPS of 1.22/1.44/1.63 yuan, respectively. Referring to comparable company valuations, we gave the company 12xPE in 2024, corresponding to a target price of 17.3 yuan; for the first time coverage, we gave a “recommended” rating.
Risk warning: Domestic downstream demand falls short of expectations, the company's overseas business expansion falls short of expectations, and the release of the company's aggregate production capacity falls short of expectations.