Core views
It is the only enterprise with a complete industrial chain in the global cement technology, equipment and engineering services market, and has global competitiveness. The company is the world's largest integrated service provider for cement technology and equipment engineering systems. Through the merger and acquisition of Hefei Institute/Sinoma Mine, the company expanded its business scope to high-end equipment manufacturing and mine operation services. Revenue/net profit to mother in '23 was 45.8/2.9 billion, YoY +6.9/ 14.8%, and the engineering/equipment/operations sector accounted for 58%/16%/23% of revenue, respectively. Future highlight 1. New contracts are growing steadily, and revenue and profit volume will increase accordingly; highlight 2. Driven by business integration and engineering business, the share of equipment/operating revenue is expected to continue to increase. The gross margin center of these two sectors is 6-10pct higher than the gross margin of the engineering sector; highlight 3. The accelerated volume of new overseas contracts signed by the company (the company 23FY/24Q1 YoY+55/ 70% of new overseas contracts), which is far higher than domestic (23FY/24Q1, YOY+55/ 70% for new domestic contracts), while the gross margin of overseas business is relatively higher (23 FY/24Q1) FY overseas/ Domestic gross profit margin (21.2%/17.8%) will also enhance the company's overall profitability.
In the engineering technology sector, demand for overseas construction is still strong, and the domestic market benefits from energy saving and carbon reduction transformation of old lines.
According to Onfield's forecast, overseas cement demand and prices in 2024 will remain generally stable compared to 2023. As the leading cement EPC business with a global market share of 65%, the company will fully benefit from the increase in overseas cement demand. In the domestic market, according to the “2023 Cement Market Operation Summary and Analysis” of the China Cement Network Big Data Research Institute, cement demand declined by an average of 2% to 3% every year from 23 to 25, but the demand for production line transformation should not be underestimated. Five departments including the National Development and Reform Commission issued the “Special Action Plan for Energy Conservation and Carbon Reduction in the Cement Industry”. By the end of '25, the share of production capacity above the energy efficiency benchmark level reached 30%. According to the company's annual report for '23, by the end of '22, there were a total of 1,572 new dry cement production lines in the country, of which 80% had been in operation for more than 10 years. The company undertook the design or construction of more than 90% of the new domestic dry cement lines, and there is a great demand for green and intelligent technological transformation of domestic cement lines.
High-end equipment manufacturing sector, strong alliances, and EPC business drive the development of equipment business. In 23, the company completed the acquisition of the Hefei Institute in terms of its shareholding structure, and became the largest and most comprehensive equipment business in the cement field. In 24 years, the company will continue to deepen the personnel/business line integration of the Hefei Institute, and the synergy effect is expected to gradually be reflected. According to McKinsey's forecast, the global market size of cement equipment is expected to be about 35-40 billion yuan per year by '25. According to the company's equipment business revenue estimates, cement equipment's global market share is about 20%. Compared with the cement EPC business of 65% of the global market share, there is still plenty of room for improvement in the equipment business.
The business space for mine operation and maintenance of cement is huge. Currently, the company's main mine operation and maintenance services focus on domestic cement, limestone and aggregate mines, and continue to expand to other types of mines. Benefiting from the accelerated pace of domestic cement going out and the company's engineering business, the overseas market is expected to further open up room for growth in the future. According to McKinsey's forecast, the domestic cement, limestone and aggregate mine third-party engineering operation and maintenance market was about 28-30 billion/year in '25. In terms of cement operation and maintenance business, on the one hand, thanks to the company's continuous receipt of orders for new cement EPC projects overseas, cement operation lines are expected to continue to increase; on the other hand, the global cement clinker production line stock is large. Considering the limited service life of equipment and the need to upgrade replacement materials, the after-sales and spare parts market is impressive.
According to McKinsey's forecast, the market for spare parts and operation and maintenance services will be 40-45 billion/year in the next 5 years.
Investment advice
As a state-owned enterprise in the entire cement engineering/equipment/operation industry chain, the company's global competitiveness continues to increase.
Changes in the business structure will also bring about a continuous increase in profitability, and I am optimistic that the company will continue to grow.
We expect the company's 24-26 net profit to be 3.35/3.81/4.31 billion yuan, corresponding to EPS 1.27/1.44/1.63 yuan, corresponding to PE 9.26/8.14/7.19, at the closing price on July 5, for the first time, covering a “buy” rating.
Risk warning
Risk of exchange rate fluctuations, risk of overseas operation, risk of overseas project construction falling short of expectations;