1Q24 results fell short of our expectations
The company announced 1Q24 results: revenue of 7.08 billion yuan, +6.9% year on year, net profit of 292 million yuan, +3.3% year on year, net profit to mother of 177 million yuan, -28.4% year on year. The company's net profit for 1Q24 fell short of our expectations, mainly due to expense ratios and minority shareholders' profit and loss exceeding our expectations.
1) Domestic cement sales and prices are under strong downward pressure. According to the Digital Cement Network, the average shipment rate of cement in central China/East China was 34%/42% in 1Q24, -11pp/ -9ppt; in 1Q24, cement production in the Central South region/East China region was -11.8%/-10.0%, respectively. At the same time, the average price of high-standard cement in central Hua/East China was -21%/-18% year-on-year in 1Q24. We estimate that the company's domestic cement sales and prices are under strong downward pressure. 2) Domestic tons of profit are expected to be under pressure, and overseas and integrated businesses may contribute to revenue and gross margin resilience. Considering the sharp year-on-year decline in 1Q24 thermal coal prices, we estimate that the company's domestic cement ton costs may have declined, but the magnitude is not enough to offset the impact of the price decline, so domestic ton profits or pressure are under pressure. However, thanks to aggregate releases and contributions from overseas business, the company's 1Q24 revenue maintained positive year-on-year growth, and gross margin was +1.7ppt to 21.9% year over year. 3) Increased cost ratios are hampering performance. 1Q24's sales/management/R&D/finance expense ratios were flat year-on-year, +0.5ppt /+0.3ppt/+1.5ppt, respectively, with financial expenses increasing by 113 million yuan year-on-year. 4) Phased downward pressure on cash flow. The net operating cash flow of the 1Q24 company was about 107 million yuan, -67.8% year-on-year, mainly due to an increase in working capital investment such as inventory. 5) There was a slight increase in the net debt ratio. At the end of 1Q24, the company's net debt ratio was about 47.4%, +1ppt at the end of '23.
Development trends
The contribution of non-cement businesses such as aggregates is expected to continue to increase. By the end of 2023, the company had built an annual aggregate production capacity of 277 million tons, and the annual export sales volume exceeded 130 million tons, +100% over the same period last year. We expect the company's aggregate capacity/output to exceed 300,000,000,000 tons in 2025, and the company's non-cement business, led by aggregates, is expected to continue to contribute incremental profits in the future.
Overseas benefits are expected to increase steadily. By the end of 2023, the company had put into production overseas with an annual production capacity of 20.91 million tons, +69% over the same period last year. In January 2024, the second phase of the company's 4,000 ton/day project in Tanzania was completed and put into operation1, and the company's overseas production capacity was further expanded. Considering that the company successively acquired production lines in Oman, South Africa and Mozambique in 2023, the increase in production and sales in 24 may be quite impressive. We believe that the company's overseas layout has a first-mover advantage. Although efficiency may decline in some regions in 2024 due to supply and demand disturbances, the overall benefits of the overseas business are expected to rise as the company's overseas production capacity expands and production and sales increase.
Profit forecasting and valuation
We maintain the 2024/25E net profit forecast of 3.07 billion yuan/3.51 billion yuan unchanged, and the current stock price corresponds to 2024/25E 10.0x/8.7x P/E. We maintain our outperforming industry rating and maintain a target price of 19.0 yuan, corresponding to 2024/25E 12.9x/11.3x P/E, implying 29% upward space.
risks
Demand recovery fell short of expectations, overseas supply and demand patterns deteriorated, and aggregate profit margins fell beyond expectations.