Core views:
The domestic cement business continues to have an advantage of excessive profits, and the bottom still has rich profits and a certain degree of elasticity.
Compared with the full-caliber ton net profit of various listed cement companies, Conch Cement's leading advantages over the years are as follows:
5-30 yuan in 2012, 10-30 yuan in 2016, 15-80 yuan in 2020, and 15-50 yuan in 2023; most companies lost money in Q1 in 2024, and the profit advantage of Conch Cement was further expanded. It is estimated that the Q1 company's full-caliber net profit was about 27 yuan/ton, with an excess profit of at least 30 yuan/ton at the bottom of the industry. The company's core competitiveness is first reflected in continued cost leadership. Compared with the industry, the cost per ton in 2023 has an advantage of 25-35 yuan. The advantage has not been significantly narrowed. The reason behind this is T-strategy, production line technical level advantage, raw material cost and long-term coal cooperation advantage, and capacity utilization rate higher than the industry; secondly, the company is also significantly lower than its peers on the cost side, mainly due to efficient management, excellent location layout, high capacity utilization rate, low debt ratio and abundant cash on account.
Increased contributions from businesses such as aggregates and overseas cement. To hedge against the operating pressure of the main domestic cement business, on the one hand, the company integrated and expanded “non-cement” businesses such as aggregates and concrete along the industrial chain. Among them, the aggregate business had high profit margins and strong synergy in recent years. By the end of 2023, the company had an aggregate production capacity of 150 million tons/year, accounting for 8.0% gross profit and 48% gross profit margin; on the other hand, it steadily expanded the overseas cement market. In 2023, Hailuo Cement had overseas revenue of 5.1 billion yuan (3.6%) and gross profit of 1.78 billion yuan (7.6%).
Profit forecasting and investment advice. The company's net profit for 2024-2026 is estimated to be 95/104/113 billion yuan, respectively. According to the latest closing market value, PE is 13.4/12.2/11.3 times, and the corresponding PB is 0.67/0.65/0.64 times, respectively. Currently at the bottom of profit and valuation. Referring to comparable company valuations, we gave a judgment of 0.85 times the reasonable PB valuation of the company's A shares in 2024, corresponding to a reasonable value of 30.39 yuan/share for the company's A shares. According to the current AH premium rate, the reasonable value of H shares is HK$24.48 per share, maintaining the “buy” ratings for A and H shares.
Risk warning. There is a risk that domestic cement demand will decline, production costs will continue to rise, new industry supply exceeds expectations, overseas and aggregate concrete business expansion falls short of expectations, etc.