The net profit of Anhui Conch Cement dropped 48% YoY to RMB3,486m in 1H24 mainly on the significant contraction of unit gross profit. We expect its earnings to surge 48% HoH in 2H24 as we expect higher unit gross profit following the rise in cement prices starting from June. We increase our 2024-26 earnings forecasts by 2-4% mainly on increases in unit profit assumptions. Nevertheless, we maintain our HOLD rating as the valuations of its shares are not attractive enough. The cement prices of its main market eastern China have been relatively weak compared to other regions.
Key Factors for Rating
Sales volume of cement and clinker of the company decreased 3% YoY in 1H24, better than the 10% YoY fall of the whole market. However, the ASP of cement and clinker dropped 21% YoY, much worse than the 7% YoY fall in the national average price. The implementation of peak load shifting production along the lower bank of Yangtze River was not good. The clinker occupancy was high and the cement price was depressed in its main market eastern China.
Hence, the unit gross profit of cement and clinker dropped 36% YoY to RMB52/tonne despite 16% YoY fall in unit cost.
Looking ahead, we expect the company's earnings to surge 48% HoH in 2H24 mainly on the expansion on unit profit. We now assume the company's gross profit per tonne of cement and clinker to improve to RMB68/tonne in 2H24. We also assume the sales volume to increase by 21% HoH in 2H24 on seasonality
We increase our 2024-26 earnings forecasts by 2-4% mainly on increases in assumptions for unit gross profit. Despite this, the company's shares are not attractive enough at current level with dividend yield just 5.1-6.2% for 2024- 26E. The cement prices in its main market eastern China are also likely to remain weak compared to other regions.
Key Risks for Rating
Higher-than-expected cement and clinker price
Lower-than-expected thermal coal price
Valuation
We lift our target price from HK$16.98 to HK$17.7. Our target price is the average of 9x 2024E P/E (10 year average) and 0.49x 2024E P/B (down from 0.57x previously). The latter is derived from the P/B vs ROE regression of its peers. Our new target price is equal to 9.8x 2024E P/E.
