2023 recurring net profit miss our expectations
Huaxin Cement announced its 2023 results: Revenue rose 10.8% YoY to Rmb33.76bn, and attributable net profit grew 2.3% YoY to Rmb2.76bn, and recurring net profit dropped 9.9% YoY to Rmb2.32bn. In 4Q23, revenue rose 10.8% YoY to Rmb9.59bn, attributable net profit grew 87% YoY to Rmb888mn, and recurring net profit increased 11.4% YoY to Rmb499mn.
The firm's 2023 attributable net profit slightly beat our expectations, but recurring net profit missed our expectations, mainly due to higher-than- expected expenses and impairment provisions in 4Q23.
Sales volume of cement and clinker grew despite headwinds in China, thanks to sound overseas performance. In 2023, the firm's
cement and clinker sales volume rose 2.5% YoY to 61.9mnt. In our view, its sales volume growth in overseas markets was faster than market expected, offsetting the decline in sales volume in China caused by falling domestic demand.
ASP and gross profit per tonne came in China under pressure due to
fierce price competition. We estimate the firm's ASP of clinker dropped Rmb29 YoY to Rmb311 in 2023, and its gross profit per tonne fell Rmb4 YoY to Rmb81. Given the fierce price competition in the domestic cement industry, we estimate that the firm's gross profit per tonne in China dropped to Rmb50-60, while its gross profit per tonne in overseas markets remained relatively high, cushioning the decline in its ASP and gross profit per tonne.
Non-cement business grew rapidly. In 2023, the firm's aggregate export volume increased 100% YoY to about 131mn tonnes, and its concrete export volume rose 66% YoY to 27.27mn cubic meters.
Overall expenses rose, weighing on profit. The firm's G&A, R&D, and
financial expense ratios edged up 0.2ppt, 0.6ppt, and 0.6ppt YoY in 2023.
Impairment increased and asset disposal brought one-off gains. In
2023, the firm made provisions for asset and credit impairment losses of about Rmb206mn (+Rmb71mn YoY), and received asset disposal income of Rmb427mn from the idle industrial land.
Cash flow remained ample and dividend payout ratio remained stable.
In 2023, the firm's net operating cash flow rose 36.5% YoY to about Rmb6.24bn, implying a dividend payout ratio of about 40% and an 2024 dividend yield of about 4.5% for A-shares.
Trends to watch Earnings contribution from non-cement businesses such as
aggregates to continue to rise. As of end-2023, the firm had built annual aggregate capacity of 277mnt, and its annual export volume of aggregates has exceeded 130mnt (+100% YoY), with gross margin staying high at 45.9%. Gross profit of the aggregate business as a percentage of the firm's overall gross profit increased 6ppt YoY to more than 27% in 2023.
We expect the firm's aggregate capacity and output to exceed 300mn and 200mn tonnes in 2025, and its non-cement businesses (e.g., aggregate) to continue contributing incremental profit.
Benefits from overseas businesses to increase steadily. We believe the
firm enjoys a first-mover advantage related to overseas expansion.
Although it may report lower operational efficiency in some regions in 2024 due to supply-demand disruptions, we expect its overall efficiency in overseas markets to improve as its overseas production capacity expands and output and sales increase.
Financials and valuation
We keep our 2024 and 2025 attributable net profit forecasts unchanged at Rmb3.07bn and Rmb3.51bn. The stock is trading at 8.9x 2024e and 7.8x 2025e P/E. We maintain an OUTPERFORM rating and cut our target price by 10.4% to Rmb19.0 due to the lower risk appetite of investors, implying 12.9x 2024e and 11.3x 2025e P/E with 45% upside.
Risks
Demand recovery disappoints; overseas supply and demand conditions deteriorate.