The performance was in line with expectations. Integration and internationalization helped the profit cycle Huaxin Cement achieve net profit attributable to the parent company of 2.76 billion yuan in 2023, +2.3% over the same period last year, which is basically in line with our expectations (2.89 billion yuan). We believe that implementing the strategy of integration and internationalization is the main reason why the company was able to achieve contrarian growth in the face of a general decline in industry profits (-53% of total profit in the cement industry in 2023). Based on the lower gross profit assumption, to reflect that the domestic cement supply and demand relationship is still under certain pressure, we reduced the company's 2024/2024 EPS by 35.7%/37.8% to 1.51/1.68 yuan, and predicted that the 2026 EPS will be 1.74 yuan. We lowered the target price of Huaxin Cement-A by 10.2% to $15.14, based on the 10x2024 P/E, which is basically in line with the company's average P/E since 2011; reduced the target price of Huaxin Cement-H by 10.2% to HK$11.85, based on 7.2x2024 P/E, which is 28% lower than the historical average P/E of A shares, which is in line with A-H discounts in the cement industry since 2014. We are optimistic that the company will continue to consolidate its advantages of integration and internationalization and maintain “buying”.

The main cement industry is stable, and overseas markets calm domestic fluctuations

In 2023, the company sold 61.9 million tons of cement and clinker, +2.5% year on year; of these, sales volume in overseas markets was 11.86 million tons, +27.7% year over year, which was the main driving force for sales growth. The average sales price was -30 yuan/ton (-8.6%) to 311 yuan/ton, the unit cost was -26 yuan/ton (-10.3%) to 231 yuan/ton, and gross profit per ton was -3 yuan/ton to 81 yuan/ton. A moderate increase in sales offset a slight decline in gross profit per ton. The gross profit of the main cement industry was -1.1% year-on-year to 5.01 billion yuan. We believe that the development of overseas markets is the key to stable profits in the main cement industry. Relatively stronger sales growth and higher gross profit levels per ton calmed the fluctuations in the domestic cement market in 2023.

Continuous integrated development, strong growth in aggregate and commercial mix sales

At the end of 2023, the company's aggregate production capacity was +31.9% to 277 million tons/year, and commercial mixed production capacity (including contract processing) was +77.5% YoY to 122 million m3/year. The integrated development of the upstream and downstream cement industry chains maintained a relatively rapid pace. Driven by the expansion of production capacity, the sales volume of aggregates and commercial mixes increased 99.7%/66.7% year-on-year, respectively, to 131 million tons/27.27 million square meters. However, due to the decline in average sales prices, gross profit per ton was -7 yuan/ton and -7 yuan/square meter to 19 yuan/ton and 43 yuan/square meter, respectively. Thanks to the strong development of the aggregate and commercial mixing business, the company's share of gross profit from the non-cement business has further increased to 44% in 2023 (2022:37%).

Construction and acquisitions go hand in hand, and overseas expansion is accelerating

In 2023, the development of the company's overseas cement market accelerated. It completed the acquisition of 64.7% of Oman Cement's shares and 100% of Natal Portland Cement's shares, respectively. The second phase of the 4,500 tons/day production line of the Tanzanian Marvini Company, which the company invested and built on its own investment, was also put into operation in 2023. At the end of 2023, the company's overseas cement grinding production capacity was +69% year-on-year to 20.91 million tons/year, accounting for 16.5% of the company. In 2023, the company's overseas divisions accounted for 31% of net profit. We expect that further release of overseas production and sales will help the company to better cope with future fluctuations in the domestic cement market.

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