1H24's performance was in line with forecasts, and 2Q24 profit improved significantly month-on-month

Shangfeng Cement 1H24 achieved net profit attributable to the parent company of 0.171 billion yuan, a year-on-year decrease of 67.9%, in line with the performance forecast (the July 9 performance forecast estimates 1H24 net profit of 0.16-0.18 billion yuan). The decline in cement volume and price, compounded by losses due to changes in fair value, is the main reason why the company's 1H24 profit is under pressure. On a quarterly basis, 2Q24 achieved net profit attributable to the parent company of 0.156 billion yuan, a significant increase over the previous month (1Q 24:0.015 billion yuan). Based on lower cement and aggregate sales and higher gross profit per ton, we lowered EPS by 3.5/4.5/ 5.4% to 0.61/0.65/0.70 yuan in 2024/2025/2026, and cut the target price by 10.3% to 8.40 yuan, based on 0.9x2024 P/B (2024BVPS: 9.33 yuan), which is one standard deviation lower than the average P/B since 2016, to reflect that the industry's supply and demand are still under pressure. Maintain “buy-in.”

Actively reduce costs and control fees, and gross profit per ton stabilized month-on-month

1H24 sold 9.39 million tons of cement clinker, -6.4% year over year. Affected by market supply and demand conflicts, the average sales price of cement was -19.7% year over year, and the average price of clinker was -26.8% year over year. The average sales cost of 1H24 cement clinker was 169 yuan/ton, -37/-4 yuan/ton, month-on-month gross profit 52 yuan/ton, and -21/+2 yuan/ton, month-on-month, respectively. Thanks to cost reduction and efficiency, against the backdrop of a further decline in cement prices, the company's gross profit per ton has shown signs of steady improvement from month to month. The sales expense ratio decreased 11.1% year on year, R&D expenses decreased 22.8% year on year, controlled management expenses fell year on year, and the overall four expenses maintained a steady downward trend.

Industry supply and demand are expected to usher in marginal improvements

With the continuous implementation of government supply-side reforms, capacity replacement policies, increased industrial concentration, and environmental control of energy consumption, cement supply is expected to be better optimized. Overall, it is expected that the supply of cement will be better optimized, moving towards a steady trend in mature markets, and the downward pressure on the industry will be mitigated to a certain extent. As September enters the traditional peak season for cement, demand for cement is expected to improve. Large companies will carry out a new round of price revisions based on consensus, and cement business profits are expected to improve marginally in the second half of the year.

The extension of the industrial chain continues, and the company's balance and liability structure is healthy

In terms of the aggregate business, preliminary preparations for the Chengdu Yunshangfeng 5 million ton aggregate production line project were completed in the first half of the year; in the environmental protection business, preliminary work on the 0.15 million ton solid waste project at the Huaining base was completed and construction started. As of the end of 1H24, the company's current monetary capital was 3.48 billion yuan, and the net interest-bearing debt/equity ratio was 7.7%. At a time when the entire industry is under pressure, the company's balance and liability structure is still very healthy, which helps the company expand diversified businesses and withstand downside risks in the industry.

Risk warning: Real estate sales stabilized slower than expected, and execution of false peak production was weaker than expected.