1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 10.31 billion yuan, -13.9% YoY, net profit to mother 0.166 billion yuan, -70.2% YoY. Among them, 2Q24 had revenue of 5.52 billion yuan, -20.0% YoY, and net profit to mother 0.195 billion yuan, or -66.8% YoY. The company's 1H24 performance was in line with our expectations.

1H24: Demand is under pressure, cement clinker sales have declined year-on-year, and prices and gross profit per ton have declined sharply.

According to the Bureau of Statistics, cement production in the 1H24 national/central and southern regions fell by 10.7%/12.7% respectively, indicating that demand is under strong downward pressure. The company sold about 28.96 million tons of cement clinker, a year-on-year decrease of -2%, which was significantly narrower than the industry. However, due to the strong overall price competition in the market, the average price of the company's cement clinker was about 238 yuan/ton, or 76 yuan/ton. Although there was also a significant pressure drop on the cost side, gross profit per ton was -21 yuan/ton to 29 yuan/ton year on year. The company's aggregate sales volume in the first half of the year was about 29.5 million tons, +107.3% year-on-year, with gross profit of 14.5 yuan per ton, and a year-on-year gross profit of -5 yuan/ton. Aggregates are rapidly expanding, and revenue and profit contributions have increased markedly.

2Q24: Sales are under further pressure, and gross profit per ton has recovered. The company sold about 15.93 million tons of cement clinker, -7.1% year on year, and the year-on-year decline increased against the backdrop of unfavorable market demand. The average price of the company's cement clinker is about 233 yuan/ton, year-on-year -75 yuan/ton, and month-on-month - 12 yuan/ton. It is still in a downward channel. The company's gross profit per ton of cement clinker was 30 yuan, -30 yuan/ton year-on-year, and +3 yuan/ton month-on-month.

Expense rates have increased, and borrowing rates have declined slightly. 1H24's sales/management/finance expense ratio was +0.2ppt/+0.3ppt year-on-year. Under the unfavorable circumstances of declining revenue, the cost ratio increased. The company's borrowing rate at the end of 1H24 was 38.8%, down 0.5ppt from the end of 1Q24.

1H24 has a basic profit of RMB 0.024 per share and declared an interim dividend of HK$0.02 per share.

Development trends

Prices in the core market are rising steadily, and profits are expected to improve markedly in the second half of the year. Since mid-late June, the company's core market for cement in South China has begun to recover prices, with a cumulative increase of 50-60 yuan/ton. According to the digital cement network, the mainstream price level in the Liangguang market has continued to be maintained recently, with no large-scale loosening. 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 profit per ton, and the recent price increase may indicate that the bottom of the company's profit has been confirmed. If the infrastructure funding situation gradually improves in the second half of the year, there is room for marginal improvement in demand during the peak season, and there is still room for further price increases, then profit recovery due to the increase in the company's volume and price in the second half of the year can be expected. In addition, production and sales of the company's aggregate business are also being rapidly released, and revenue and profit contributions are expected to continue to increase, further supporting the company's performance recovery.

Profit forecasting and valuation

We maintain the 2024/25E net profit of 0.851 billion yuan/1.265 billion yuan unchanged, and the current stock price corresponds to 2024/25E 12.2x/8.2x P/E. We maintain our outperforming industry rating and maintain a target price of HK$2.5, corresponding to 2024/25E 18.5x/12.5x P/E, implying 52% upside.

risks

Demand recovery fell short of expectations, and price competition intensified.