1H24 results slightly exceeded our expectations

The company announced 1H24 results: revenue of 16.24 billion yuan, +2.6% YoY; net profit to mother of 0.731 billion yuan, or -38.7% YoY. Among them, 2Q24 revenue was 9.15 billion yuan, -0.5% YoY, and net profit to mother was 0.553 billion yuan, or -41.4% YoY. The company's 1H24 performance slightly exceeded our expectations, mainly due to the company's 2Q24 revenue and gross margin resilience exceeding our expectations.

1) The domestic cement business is facing significant price decline challenges. 1H24 The overall pressure on the domestic cement industry was obvious. In the first half of the year, production fell 10% year on year, and the price level was also drastically lowered. 1H24 sold about 20.89 million tons of cement clinker in China, -16% year over year. The average price was about 244 yuan/ton, or -57 yuan/ton year on year.

Domestic cement revenue in the first half of the year was about 5.11 billion yuan, -32% year-on-year, accounting for about 31% of the company's revenue. 2) Overseas business continues to maintain relatively rapid volume and price growth. 1H24's overseas cement clinker sales volume was about 7.6 million tons, a sharp increase of 47% over the previous year. The average price was about 471 yuan/ton, or +25 yuan/ton over the same period last year.

The gross margin of the overseas division of 1H24 is about 33.2%, and the net profit is about 0.503 billion yuan. Considering that overseas cement revenue accounts for about 97% of overseas division revenue, we roughly estimate the company's gross profit of 1H24 overseas tons of about 156 yuan (195 yuan in 2023), and the net profit per ton is 66 yuan (not to the parent caliber, 85 yuan in 2023). 3) Continued expansion of integrated business. 1H24's aggregate sales volume was about 71.53 million tons, or +42% year-on-year, with an average ton price/ton gross profit of 41 yuan/20 yuan, or -1.4 yuan/+0.3 yuan; concrete sales volume was 14.7 million square meters, +34% year-on-year, with average square price/square gross profit of 268 yuan/31 yuan, respectively, or -22 yuan/-7 yuan. The company's integrated business continues to grow, and the non-cement business accounts for 60% of EBITDA.

4) The overall gross margin is stable, and the cost ratio has increased. 1H24's comprehensive gross margin was about 23.65%, -0.73ppt year over year, and overall stable. The company's sales/management/financial expense ratios were +0.5ppt/+0.9ppt, respectively. 5) Strong cash flow performance. The net operating cash flow of 1H24 was approximately 1.73 billion yuan, -19% year-on-year. The decline was less than the decline in net profit due to mother and was still high, and it is resilient.

Development trends

Overseas layout has been further accelerated, and growth momentum continues to be unleashed. During the reporting period, the company continued to promote the construction of 3,000 tons/day production lines in Mozambique, and began construction and expansion of production lines in Malawi, Zambia, South Africa and Zimbabwe. After all are completed and put into operation, the company's overseas clinker production capacity will reach 18.45 million tons per year, and it will have an annual grinding capacity of 25.2 million tons of cement. We believe that as the company's overseas production capacity expands and production and sales increase, overseas business benefits are expected to level up, driving the company to continue to unleash growth momentum.

Profit forecasting and valuation

Due to the reduction in the company's profit assumption per ton, we lowered the company's 2024/25E net profit of 29.9%/28.5% to 2.15 billion yuan/2.51 billion yuan. The current stock price corresponds to 2024/25E 10.3x/8.9xp/E. We maintained our outperforming industry rating and lowered our target price by 24% to 14.5 yuan, corresponding to 2024/25E14.0x/12.0x P/E, implying 35.5% upside.

risks

Price competition in the industry has exceeded expectations.