While the company's net profit dropped 70% YoY in 1H24, it actually recovered from a net loss of RMB29m in 1Q24 to a net profit of RMB195m in 2Q24 on improved unit profit. We expect its profit to further improve in 3Q24 as cement prices in its main market Southern China did not rise until mid-June. Over the next two years, the rise in sales volume of aggregate will enable its earnings to post a CAGR of 29%. The increase in interim payout ratio from 45% to 77% is a positive sign. We increase our 2024-26 earnings forecasts by 24-39% and upgrade our call to BUY with target price raised to HK$1.77.
Key Factors for Rating
While its realised cement price dropped 4% QoQ in 2Q24, the gross profit per tonne for cement and clinker improved from RMB27/tonne in 1Q24 to RMB30/tonne in 2Q24 on lower coal price and cost savings. Together with the 19% QoQ increase in sales volume of cement and unit profit of aggregate, the company successfully turned around in 2Q24.
For 1H24, its unit cost of cement dropped 18% YoY to RMB210/tonne. In which, the unit coal cost dropped 24% YoY to RMB85/tonne. In addition to lower coal price, the unit consumption of coal also declined 3% YoY to 129.9kg/tonne.
Looking ahead, we expect its net profit to jump 3.4x HoH in 2H24. We expect the improved unit profit in its main market Southern China since mid-June to last until the end of the year with the autumn peak season to come soon. On the other hand, coal price remained lacklustre so far into 3Q24. Its peers now are also more willing to implement peak load shifting production given the very poor profitability in 1Q24.
Over the next two year, we expect the company's earnings to post a CAGR of 29% mainly on the growth in earnings of its aggregate business as the sales volume increases with more new projects starting to contribute.
We believe the worst is over for the company. The meaningful dividend yield will provide downside protection for share price.
Key Risks for Rating
Sharp fall in cement prices.
Sharp rise in thermal coal prices.
Valuation
We lift our target price from HK$1.55 to HK$1.77. Our target price is the average of 10.3x 2024E P/E (10 year average, up from previously 8x) and 0.3x 2024E P/B (down from 0.33x previously). The latter is derived from the P/B vs ROE regression of its peers. Our new target price is equal to 12.7x 2024E P/E.
