Recently, the company announced its 2023 annual report. The company's revenue for 2023 was 107.4 billion yuan, -19.0% year on year; net profit to mother was 2 billion yuan, -56.7% year on year; net profit after deducting non-return to mother was 600 million yuan, -78.4% year on year. The company plans to pay a cash dividend of 1.14 yuan (tax included) for every 10 shares, with a dividend rate of 50.26%.

The company's cost per ton dropped significantly, and 23Q4 profit bucked the trend. In 2023, the company's cement clinker sales volume was -3.0% year over year, to 260 million tons. The average ton price, ton cost, and gross profit per ton were -58, -50, and -9 yuan, respectively. Considering that the average price of coal fell by about 300 yuan year on year in 2023, the coal price affected the company's ton cost reduction by 30 yuan, so the company relied on cost management to reduce non-coal costs by 20 yuan/ton. Among them, 23H2's tonnage cost was -70 yuan, to 209 yuan, and the 23Q4 comprehensive gross margin was +4.4pct month-on-month, to 19.5%. We believe that the decline in cement clinker tonnage costs was an important reason for the month-on-month improvement in the company's profit in the fourth quarter.

The aggregate business continued to expand, accounting for 60% of net profit. Aggregate sales in 2023 were +24% year over year to 140 million tons. Average price per ton, ton cost, and gross profit per ton were -7, -2, and -5 yuan, respectively, and the profit contribution of the aggregate business increased year on year. In 2023, the company invested in the construction of the “Chizhou China Building Materials New Materials Co., Ltd. aggregate production base project with an annual output of 40 million tons, with an investment amount of 10.6 billion yuan, continuing to rapidly expand the aggregate business. Judging from the segment data, the aggregate division contributed 1.2 billion yuan in net profit in 2023, while cement and commercial mixing contributed 300 million yuan and 500 million yuan respectively. In 2023, the company's aggregate business accounted for about 60% of net profit.

China Building Materials Co., Ltd. plans to use equity and cash to compensate the company 21.8 billion yuan. In 2021, the company purchased 100.00% of Zhonglian Cement's shares, 85.10% of Nanfang Cement's shares, 79.93% of Southwest Cement's shares, and 100.00% (performance commitment assets) from 26 counterparties including China Building Materials Co., Ltd., and signed a “Performance Commitment Compensation Agreement”. The actual net profit of performance commitment assets from 2021 to 2023 was 13.7 billion yuan, which is lower than the promised value of 35.5 billion yuan. Therefore, China Building Materials Co., Ltd. is required to use equity and cash to pay compensation to the company. At 21.8 billion yuan, the company expects to recover 20 billion yuan in shares and 1.8 billion yuan in cash compensation. The relevant accounts receivable have been included in the financial statements, which will not affect the company's profit and loss in 2023. According to the 2021 additional issuance price of 12.90 yuan/share, the number of compensated shares is about 1.55 billion shares (20 billion yuan/12.90 yuan), accounting for 18% of the company's total share capital of 8.663 billion shares. The compensation shares were bought back by the company at a total price of 1 yuan and cancelled.

Give it an “better than the market” rating. We expect the cement industry to continue to decline in 2024, with demand support from real estate, infrastructure, etc., and the influence of industry self-regulation. At the same time, the company will increase its international business layout. We expect the company's EPS from 2024 to 2026 to about 0.39, 0.44, and 0.49 yuan, respectively. Considering the company's aggregate business growth, high dividend ratio and future operational efficiency improvements, it will be 18 to 20 times PE in 2024 (corresponding to 14.76 to 16.40 times the price-earnings ratio of EPS when total share capital is diluted after cancellation is completed), which is a reasonable value The range is 7.02 to 7.80 yuan/share.

Risk warning. Demand fell beyond expectations, coal prices rose sharply, and progress in internationalization fell short of expectations.