1Q24 profit declined year-on-year, mainly due to the decline in the domestic cement market
Huaxin Cement announced 1Q24 results, achieving net profit attributable to the parent company of 180 million yuan, -28.4% year-on-year.
We believe that the decline in profits in the domestic cement business is the main reason behind the year-on-year decline in the company's 1Q24 profit, offsetting the increase in profits brought about by integrated transformation and overseas cement expansion. We kept the 2024/2025/2026 EPS forecast unchanged at 1.51/1.68/1.74 yuan, and the target price of Huaxin Cement-A increased by 18.0% to 17.86 yuan, based on 11.8x2024 P/E, consistent with comparable overseas companies to reflect the company's leadership in transformation and development. The target price for Huaxin Cement-H was maintained at HK$11.85, based on 7.2x2024 P/E, which is 28% lower than the historical average P/E (9.9x) of A-shares, which is in line with the A-H discount in the cement industry since 2014. We are optimistic that the company will continue to consolidate its advantages of integration and internationalization and maintain Huaxin Cement-A and Huaxin Cement-H “buy” ratings.
Revenue and gross profit grew steadily, and expenses and minority shareholders' revenue increased +6.9% year-on-year to 7.08 billion yuan in 1Q24 revenue, mainly due to strong growth in aggregate, commercial mix, and overseas cement sales, but this was partially offset by a year-on-year decline in domestic cement volume and price. High-margin businesses such as aggregates and overseas cement businesses saw relatively faster revenue growth, driving 1Q24's consolidated gross margin of +1.7 pct to 21.9% year over year, and gross profit of +15.6% to 1.55 billion yuan. Due to increased expenses due to business expansion (total sales, management, R&D and financial expenses of 1.07 billion yuan, +26.2% year over year), net profit +3.3% to 290 million yuan, while net profit attributable to minority shareholders accounted for +26.9pct year over year to 120 million yuan, net profit attributable to parent company -28.4% YoY to 180 million yuan.
There are still supply and demand challenges in the domestic cement market, and overseas development is expected to accelerate. As housing investment is still under pressure, infrastructure investment growth will slow down. We expect domestic cement demand may still be adjusted in 2024, and profits in the domestic cement business may still be under pressure. However, the development of overseas business is expected to accelerate. After successively completing the merger of Oman Cement and Napal Portland Cement, the company strengthened its layout in regional markets such as Oman, South Africa and Mozambique. By the end of 2023, overseas cement grinding production capacity had reached 20.91 million tons/year, +69% over the same period last year. The comprehensive consolidation of the new project is expected to accelerate the growth of overseas cement sales. Combined with higher prices and gross profit levels in overseas markets, the company is expected to better smooth out disturbances in the domestic cement market.
Leading transformation and development, new growth poles are being formed
Thanks to the early start of the pace of transformation and development, the company's integrated business and overseas cement business have begun to take shape. Aggregates, commercial mixes and overseas cement have accounted for 55% of total revenue in 2023, and the EBITDA share has reached 68%. Meanwhile, the share of domestic cement revenue has dropped to 41% (2021:71%), and the share of EBITDA has dropped to 28% (2021:67%). The gradual formation of a new growth pole helps the company gradually reduce its dependence on cyclical fluctuations in the domestic cement market and form a second growth curve more quickly.
Risk warning: Real estate sales recovery is slower than expected, and production execution at wrong peak is weaker than expected.