The performance was better than forecast, and the dividend payout ratio was further improved

China Building Materials achieved net profit attributable to the parent company of 3.86 billion yuan in 2023, or -52% year-on-year, which is superior to the January 26 forecast guidance range (net profit attributable to mother is estimated to be around -65% YoY). Although the company's overall profit declined due to market supply and demand challenges, the quality of operations improved steadily. Gross margin was +0.9 pct to 17.8% year over year, operating cash flow was +10.1% year over year to 29 billion yuan, various types of provision were -24.2% to 360 million yuan, overseas revenue share was +3.9 pct year on year to 13.5%, and the dividend ratio was further increased to 50% (2022:40%). Considering that the supply and demand relationship in the basic building materials market may still face certain challenges in 2024, it is predicted that in 2024/2025/2026 EPS will be 0.50/0.64/0.78 yuan, respectively (previous value:

1.58/1.65/- yuan). The target price was lowered to HK$3.82 (previous value: HK$10.70), based on 7x2024 P/E, a 20% discount from the historical average since 2008 (9x) to take into account the entry of cement into the adjustment period. Maintain “buy-in.”

Basic building materials: Domestic market profits have yet to stabilize. Internationalization is expected to accelerate. The operating profit of the basic building materials sector is -37.3% to 7.2 billion yuan in 2023. The fall in prices of major products such as cement, commercial mixtures, and aggregates is the main reason. Cost control and the increase in aggregate sales have partly calmed the impact of falling prices. The ASP for cement clinker, commercial mix and aggregate in 2023 was -18.2%, -16.3%, and -12.9%, respectively, to 272 yuan/ton, 357 yuan/square meter, and 39 yuan/ton, respectively. Aggregate sales were +18.9% YoY to 156 million tons. The comprehensive gross margin of the basic building materials sector was -0.7pct to 14.1% year over year. We expect that the domestic market supply and demand relationship for basic building materials products may still face some pressure in 2024, but with the improvement of international platforms, the expansion of overseas markets is expected to accelerate. Furthermore, by continuing to improve competitiveness through integration and optimization, we expect that the company's basic building materials business will still be able to seize the leading factors.

New materials: Expansion and cost reduction achieved remarkable results. The second tier grew rapidly. The gross profit of the company's new materials segment was +6.8% year-on-year to 11.9 billion yuan in 2023, but due to the year-on-year decrease in asset disposal revenue of sector companies, operating profit was -12.3% to 7.1 billion yuan. The expansion and cost reduction of the new materials sector was outstanding. Sales of glass fiber/gypsum board/fan blades in the first tier products were +18.8%/+3.8%/+5.0%, respectively, and unit costs were -6.3%/-6.1%/-14.9%, respectively. Sales of lithium film/waterproof membrane/ carbon fiber in second-tier products were +52.9%/+35.1%/+92.5%, respectively, and unit costs were -12.3%/-6.2%/-21.3%, respectively. The sales volume of the second tier grew even more rapidly.

Engineering technology services: The synergy effect is further reflected. After the integration of the Hefei Institute was completed, the synergy effect of the engineering technology and service sector was further demonstrated. In 2023, the revenue of the sector was +6.4% YoY to 45.1 billion yuan, and operating profit +19.1% YoY to 3.5 billion yuan. The sector's gross margin and operating profit margin were +2.3/0.9 pct year-on-year to 18.6/7.8%, respectively. The sector signed 61.6 billion yuan of new contracts during the year, +18% year over year, including 33.3 billion yuan of overseas contracts, +55% year over year (2022: +2% year over year). Strong growth in new contracts has laid a good foundation for further growth in subsequent business volume.

Risk warning: The recovery of real estate sales was slower than expected, and the industry's erroneous peak production execution was weaker than expected.