1Q24 results are basically in line with forecasts

China Building Materials's net profit for 1Q24 was 1.35 billion yuan (1Q23: -530 billion yuan), which is basically in line with the profit warning issued on April 17 (estimated to be about -1.30 billion yuan). The further bottoming of cement and glass fiber prices in 1Q24 was the main reason for the company's year-on-year loss expansion. The increase in sales volume of new materials and the improvement in the quality and efficiency of engineering services partially offset the impact of the decline in cement and glass fiber prices. We keep the 2024/2025/2026 EPS forecast of $0.50/0.64/0.78 unchanged, and maintain the target price of HK$3.82, based on 7x2024 P/E, with a 20% discount compared to the historical average (9x) since 2008 to take into account cement demand entering an adjustment period. We are optimistic that the company will enhance the competitiveness of the basic building materials sector through cost reduction and efficiency, collaborative development of new material product echelons, and further develop the benefits of integration and transformation through engineering services. Maintain “buy-in.”

Basic building materials: Cement showed excellent cost reduction. Gross profit of aggregate tons shrank. The company achieved 45.84 million tons of cement and clinker sales in 1Q24, or -16.0%. If some of the cement assets purchased in 2023 are taken into account, sales volume of the same caliber is -12.1%, which is basically consistent with the industry as a whole (-11.8% of the country's cement production over the same period). The cost reduction performance was still impressive. The unit cost was -63 yuan/ton to 221 yuan/ton, but due to the larger drop in average sales price (-73 yuan/ton year on year) to 226 yuan/ton, gross profit per ton was -9 yuan/ton to 5 yuan/ton year over year. The aggregate business sold 25.39 million tons, and overall remained flat. Due to the decline in average sales price (-7 yuan/ton to 34 yuan/ton) and the increase in unit costs (+3 yuan/ton to 29 yuan/ton year over year), gross profit per ton was -10 yuan/ton to 5 yuan/ton year over year.

New materials: Glass fiber prices are undergoing a recovery. Among the major holding companies that are expected to increase sales of products in the new materials sector, Beixin Building Materials 1Q24's net profit was +38.1% to 820 million yuan, and the stable price expansion of the gypsum board business contributed to profit growth; Sinoma Technology's 1Q24 net profit was -47.7% to 220 million yuan, and profits were suppressed by the year-on-year decline in glass fiber and lithium film prices, but this was partially offset by the cost reduction of lithium film expansion. Affected by the bottom of glass fiber prices, China Jushi 1Q24, the main shareholding company in the sector, achieved net profit of -62.0% year-on-year to 350 million yuan. By the end of April, the price of glass fiber had been repaired at a total of 500 yuan/ton (16.7%) since the end of March. We expect sales of products in each tier to continue to grow collaboratively, and sector profits are expected to improve significantly in 2Q24.

Engineering technology and services: Overseas demand is strong, and transformation is steadily advancing, Sinoma International 1Q24, a major holding company in the engineering technology and service sector, with net profit of 640 million yuan, +3.1% year over year. Among them, revenue achieved steady growth (+2.7% to 10.29 billion yuan), and gross margin continued the upward trend (+2.6 pct to 19.5% year over year). While the total number of new contracts signed was stable (21.22 billion yuan of new contracts signed in 1Q24, -2% year-on-year), the trend of structural optimization was significant. Overseas markets with higher added value signed a new 14.29 billion yuan, +70% over the same period, and more sustainable operating service contracts +43% to 4.51 billion yuan over the same period. We expect that the strong growth in overseas demand and steady progress in transformation are expected to further improve the operating quality and efficiency of the engineering services sector.

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