Net profit from 1H24 is expected to drop 65-75% year over year

The company announced a profit warning for the first half of 2024: the net profit of 1H24 is expected to drop 65%-75% year on year, mainly due to the year-on-year decline in sales prices of cement products and concrete. According to the forecast center, we calculate that the company's net profit for 1H24/2Q24 was approximately 0.172/0.201 billion yuan, or -70%/-67% year-on-year.

Key points of interest

Affected by various aspects such as capital, competitive environment and rainy weather, the company's profits in the first half of the year were under pressure. In the first half of this year, due to the overall shortage of capital for downstream projects and frequent rainfall and flooding, demand for cement in South China was always weak. Conflicts between supply and demand within the industry were prominent, and price competition was intense. The two Guangzhou regions, the company's core markets, showed signs of weakening volume and price as a whole. According to the Digital Cement Network, cement production in Guangdong/Guangxi in January-May was -9.2%/-9.7%, respectively; the average price of cement in South China fell nearly 20% year on year in the first half of this year. Due to the sharp drop in cement prices, the company's cement profit in the first half of the year was clearly under pressure; we expect that the aggregate project's profit release may also be disrupted by market demand and logistics factors.

The increase in South China has been successfully implemented and the performance is steady, and profit recovery can be expected in the second half of the year. Starting in mid-late June, cement in South China will begin two rounds of price repricing. According to Digital Cement Network, by the end of June, cement prices in Guangdong and Guangxi had increased by 50 yuan and 60 yuan/ton respectively. The price level of the industry had increased markedly, and corporate profitability had been greatly restored. At the same time, we have also observed that the willingness of regional enterprises to compete on prices has clearly weakened, and they tend to maintain prices. According to the Digital Cement Network, prices of leading enterprises in the core regions of Liangguang have remained stable as of July 12. We believe that the downward pressure on the company's profit in the first half of the year was mainly due to lower unit sales prices and ton profit. If the company's cement prices were maintained well in the subsequent off-season, with the gradual improvement of infrastructure funding in the second half of the year, there is room for marginal improvement in demand during the peak season, and the company still has room for further price increases during the peak season, then profit recovery due to the increase in the company's volume and price in the second half of the year can be expected.

The profit contribution of the aggregate business is expected to be gradually released, and the medium-term dividend capacity is expected to increase. By the end of 2023, the company's aggregate production capacity was about 92.5 million tons per year. We believe that as demand improves in the second half of the year and the product structure of new projects is gradually optimized, the company's aggregate sales volume and ton profit are expected to improve in the second half of the year, and the profit contribution of the aggregate business is expected to be steadily released. Looking ahead to the medium term, we believe that as capital expenses related to the company's aggregates are gradually reduced to a low level, and the company's operating cash flow is expected to recover collaboratively with profits, we believe that the company's dividend capacity is expected to increase. Considering that the company has maintained a dividend ratio of more than 45% in recent years, if there is a major recovery in profits, the potential dividend return is quite impressive. We believe that the company has some flexibility in recovering its performance in the medium to short term, and that medium- to long-term dividend returns are expected to stabilize, maintaining the top pick recommendation in the cement sector.

Profit forecasting and valuation

Considering the steady price of the company's core market, profits are expected to recover significantly in the second half of the year. We raised the company's 2024/25E net profit of 25.9%/57.3% to 0.851 billion yuan/1.265 billion yuan. The current stock price corresponds to 2024/25E 13.3x/9.0x P/E. We maintained our outperforming industry rating and raised our target price by 29.5% to HK$2.5, corresponding to 2024/25E 18.5x/12.5x P/E, implying 39% upside.

risks

The price of cement fell, and the recovery in demand fell short of expectations.