Results are in line with forecasts, changing from profit to loss in 2023
Jidong Cement achieved net profit attributable to the parent company of 1.50 billion yuan in 2023, which changed from profit to loss over the previous year, in line with the performance forecast issued on January 31 (-1.40 billion yuan to -1.50 billion yuan). Despite challenges to profitability, free cash flow increased to $1.1 billion (2022: -180 million yuan) through investment cuts (-70.6% YoY to $1.05 billion in 2023). The balance sheet remains healthy, with a net debt ratio of 46.9% at the end of 2023 (2022:41.8%). Based on the assumption of lower cement sales volume and gross profit per ton, we forecast that the company's 2024/2025/2026 EPS will be 0.09/0.20/0.32 yuan (previous value: 0.34/0.71/-yuan), and the target price will be reduced by 6.5% to 8.39 yuan, based on 0.77x2024 P/B (2024 BVPS: 10.90 yuan), which is one standard deviation lower than the average P/B since 2007 to reflect the challenges of the supply and demand relationship in the cement industry. We expect that by reducing costs and leading the industry ecosystem, the company's operating efficiency is expected to gradually improve. Maintain “buy-in.”
The cement sales performance was impressive, and the price drop was greater than the cost
The company achieved sales volume of 93.24 million tons of cement and clinker in 2023, which is significantly superior to the overall performance of the regional market (cement production in the region where the company is located -6.2% YoY), and the market position has further improved. The unit cost was -37 yuan/ton to 235 yuan/ton. Of these, raw materials/fuel power contributed 16 yuan/ton and 22 yuan/ton, respectively. However, the cost reduction was insufficient to make up for the drop in prices (average sales price -82 yuan/ton to 258 yuan/ton), and gross profit per ton was -45 yuan/ton (-66.2%) year-on-year to 23 yuan/ton.
The price performance of the North China market has been leading since the beginning of the year. The efficiency improvement in 2024 is expected. We expect that by promoting a balanced and win-win environment in the industry and focusing on lean management by strengthening business benchmarking, the company is expected to reap results in price recovery and cost reduction.
Since the beginning of 2024, cement prices in the North China market have also bottomed out and rebounded. As of March 22, cement in North China had risen 16 yuan/ton (+4%) from the beginning of the year, while the national average price dropped further by 20 yuan/ton (-5%) during the same period from the beginning of the year. North China contributed 73% of the company's revenue in 2023, and the priority bottoming of the regional market is also expected to create better conditions for the gradual restoration of the company's profits. Despite this, due to low off-season sales in the northern region, the company's profit challenge is likely to continue in 1Q24.
Risk warning: Real estate sales recovery is slower than expected, and cement ecological construction is weaker than expected.