Key points of investment

Incident: The company disclosed its 2024 mid-year report, achieving operating income of 45.566 billion yuan, or -30.4% year-on-year, and net profit to mother of 3.326 billion yuan, or -48.6% year-on-year. Among them, Q2 achieved operating income of 24.238 billion yuan, or -28.9% year-on-year, and net profit to mother of 1.823 billion yuan, or -53.4% year-on-year.

Operational resilience during the downturn was further evident, and non-cement and overseas businesses contributed new growth points. (1) The company's cement and clinker sales volume in the first half of the year was 0.126 billion tons, which was significantly lower than the national cement production during the same period. We estimated the average price per ton was 240 yuan, -65 yuan year on year; (2) the gross profit per ton of cement and clinker was 52 yuan, down 5 yuan from 2023H2, and -29 yuan year on year. The year-on-year decline was less than average price, mainly due to the drop in coal prices. In addition, costs other than single ton of fuel and power also fell by 6.3 yuan year on year; (3) aggregate and commercial mixed operating income fell by 6.3 yuan, respectively. 191, 1.178 billion yuan, +30% and +21%, respectively. The company's non-cement business contribution in the first half of the year reached 23.6%, +7.2pct year on year. (4) Revenue from overseas building materials was +5.7% year over year, gross margin increased 10.2 pct to 40.0% year on year, and gross profit and gross profit contribution reached 0.92 billion yuan/10.7%, respectively.

(5) The company's gross margin in Q2 was 20.0%, +2.2pct month-on-month. It is expected that Q2 will improve slightly from a steady gross profit per ton of product compared to Q1.

Expenses are properly controlled, and comprehensive net profit per ton is hovering at the bottom of history. (1) The company's cost per ton of products in the first half of the year was 34.5 yuan, -1.2 yuan year-on-year. The most significant reduction was single-ton management expenses and R&D expenses, which were -2.6 yuan/-1.3 yuan, respectively. In addition, net income from financial expenses was -46.1% year-on-year, mainly due to exchange exchange losses due to exchange rate fluctuations in the entire cement industry; (2) Against the backdrop of losses in the cement industry as a whole, the company's comprehensive net profit from cement and clinker products in the first half of the year was 27 yuan, -25 yuan year on year, up 1 yuan from 2023H2. The comprehensive net profit per ton was basically stable compared to Q1, and the gross profit and net profit per unit of cement were at the bottom of history.

Operating cash flow bucked the trend and capital expenditure continued to shrink. (1) 2024H1 achieved a net cash flow of 6.871 billion yuan from operating activities, +35.8% year over year, mainly due to the company's optimized asset structure, due to the decline in account balances such as accounts receivable and prepayments compared to the beginning of the year. The company paid 5.712 billion yuan in cash for the purchase and construction of fixed assets, intangible assets and other long-term assets, reflecting the company's efforts to further control capital expenditure; (2) The balance ratio of the company was 19.5%, +0.2 pct year on year, and the interest-bearing debt was 25.124 billion yuan, an increase of 1.252 billion yuan over the previous year.

Under losses across the industry, improvements in industry self-discipline have laid the foundation for a rebound in the economy, and we expect policies to accelerate supply-side clean-up in the medium to long term. The cement industry lost more than 50% in the first half of the year. Leading companies led the way to improve industry self-discipline. The strength and sustainability of supply-side regulation increased markedly. As seasonal demand recovers, the national price center is expected to rebound in the second half of the year. Further tightening of medium- to long-term dual carbon and environmental protection policies has brought stronger restrictions on the supply side. The restrictions on industry self-discipline in the medium to short term are expected to be strengthened, which is conducive to the optimization of the industry's competitive pattern and the acceleration of the supply-side clean-up. It is necessary to continue to observe the pace of implementation.

Profit forecasting and investment ratings: The company demonstrated comprehensive advantages such as cost leadership during the downturn, and the expansion of the industrial chain provided new growth momentum. Currently, the cement sector's net market ratio valuation is at the bottom of history. As industry self-discipline improves, the valuations of leading companies are expected to recover. Based on the decline in domestic cement demand exceeding expectations, we adjusted the company's net profit from 2024-2026 to 8.35/9.74/11.21 billion yuan (previous value was 9.02/11.25/12.95 billion yuan). The corresponding price-earnings ratio was 13/11/10 times, maintaining the “increase” rating.

Risk warning: the decline in cement demand exceeds expectations; the upstream and downstream expansion of the industrial chain falls short of expectations; the risk of increased market competition.