Non-profit deductions for 2023 fell short of our expectations
The company announced its 2023 results: revenue of 33.76 billion yuan, +10.8% year on year; net profit to mother of 2.76 billion yuan, +2.3% year on year; net profit without return to mother of 2.32 billion yuan, -9.9% year on year. 4Q23 revenue was 9.59 billion yuan, +10.8% year over year, net profit to mother was 888 million yuan, +87% year over year; net profit after deducting non-return to mother was 499 million yuan, +11.4% year over year. The company's net profit for 2023 was slightly higher than our expectations, but the net profit after deducting non-net profit fell short of our expectations, mainly because 4Q23 expenses and impairment measures increased compared to our expectations.
1) Benefiting from overseas contributions, cement clinker sales bucked the trend. In 2023, the company sold about 61.9 million tons of cement clinker, +2.5% over the same period last year. We estimate that the excessive increase in overseas sales made up for the decline in sales due to declining domestic demand. 2) Domestic price competition is fierce, and average prices and gross profit per ton are falling under pressure. We calculate that the company's average price per ton of cement clinker in 2023 was about 311 yuan, the year-on-year -29 yuan, the gross profit per ton was about 81 yuan, and the year-on-year gross profit was -4 yuan. Considering the intense price competition in the domestic cement industry, we estimate that the company's gross profit per ton may fall back to 50-60 yuan, while maintaining relatively high gross profit per ton overseas, buffering the decline in the company's average price and gross profit per ton. 3) The non-cement business is growing rapidly. In 2023, the company's aggregate export sales volume was about 131 million tons, +100% year over year; concrete sales volume was 27.27 million square meters, +66% year over year. 4) The overall rise in costs has dragged down profits. In 2023, the company's management/ R&D/ finance expense rates were +0.2pp/+0.6ppt/+0.6ppt, respectively. 5) Impairment has increased, and asset disposal has brought one-time benefits. The company accrued asset and credit impairment losses in 2023 of about RMB 206 million, +RMB 71 million over the same period last year; it received asset disposal revenue of RMB 427 million, mainly from the storage of idle industrial land. 6) Cash flow remains abundant, and dividend rates remain stable. The company's net operating cash flow in 2023 was about 6.24 billion yuan, +36.5% year-on-year, maintaining a dividend ratio of about 40%. Currently, A shares correspond to a dividend rate of about 4.5% in 2024E.
Development trends
The contribution of non-cement businesses such as aggregates is expected to continue to increase. By the end of 2023, the company had built an annual aggregate production capacity of 277 million tons, with annual export sales exceeding 130 million tons, +100% year-on-year. The gross margin remained at a high level of 45.9%, and gross profit contributed more than 27%, compared to +6ppt. We expect the company's aggregate capacity/output to exceed 300,000,000,000 tons in 2025, and the company's non-cement business, led by aggregates, is expected to continue to contribute incremental profits in the future.
Overseas benefits are expected to increase steadily. 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.
Profit forecasting and valuation
We maintain the 2024/25E net profit forecast of 30.7/3.51 billion yuan unchanged. The current stock price corresponds to 2024/25E 8.9x/7.8x P/E. We maintain our outperforming industry rating. Considering the current market's reduced risk appetite for the sector, we lowered our target price by 10.4% to 19.0 yuan, corresponding to 2024/25E 12.9x/11.3xP/E, implying 45% upward space.
risks
Demand recovery fell short of expectations, and overseas supply and demand patterns deteriorated.