South China region: closed+high concentration, the country's best regional demand: short-term pressure, mid-term Greater Bay Area construction provides new momentum. The total economy of Guangdong Province has been among the highest in the country all year round. In the past few years, the growth rate of fixed asset investment and real estate development investment in Guangdong was often higher than that of the whole country, but in 2022 to 2024, the overall investment environment was under pressure, and the growth rate of fixed investment in Guangdong outperformed the rest of the country. However, construction in the Greater Bay Area progressed gradually in the medium term, and regional transportation construction is expected to take the lead, thereby bringing marginal support to the demand for related materials. Judging from the cement review, demand in Liangguang peaked later than the whole country, which means there is more momentum in mid-cycle demand. Compared with the peak demand in various markets in 2023, the decline in the North was 20% to 50%, and the South was about 10% to 25%. However, the Liangguang market peaked even later. For example, Guangxi peaked in 2017, while Guangdong only peaked in 2020.

Supply: The new wave of production capacity in South China has gradually come to an end, and the market has entered rebalance. The conflict between supply and demand in South China is weaker than in other markets, and Guangdong has a supply gap all year round. High profit in the last round cycle combined with the new replacement regulations in 2018, and some enterprises accelerated capacity replacement to optimize equipment and regional distribution. Since 2020, the country has put in production capacity of 70.56 million tons of clinker, mainly focusing on Guangxi and southwest China. Among them, Guangxi added 27.37 million tons, accounting for about 25% of its stock; currently, the profit center has declined sharply, the new production capacity has basically come to an end in all major regions, and the market has entered a rebalance; moreover, the comprehensive cost of this part of the new production capacity is high. At current prices, it has little profit, and there is no subjective momentum for the price war. Furthermore, Liangguang introduced Differentiated False Peak this year, and the market pattern was clearly repaired through unequal shutdown of kilns by large and small companies.

Competitive pattern: semi-closed+high concentration support, stable foundation of collaboration. The two centers are highly concentrated. Guangdong has a clinker production capacity of 0.108 billion tons; CR3 and CR5 are 51% and 70% respectively; Guangxi clinker production capacity is 0.106 billion tons; CR3 and CR5 are 50% and 66% respectively. The leaders are China Resources and Conch. The equipment differences between leading regional enterprises are not significant, and the foundation for collaboration is in place. Compared to the Yangtze River Delta, the two Guangzhou are relatively closed. Although there is Xijiang transportation, overall capacity and convenience are weaker than Yangtze River transportation, which also gives the market a better basis for collaborative price promotion.

Company analysis: Backed by state-owned enterprises, high elasticity when the pattern is reversed

The company is the only state-owned enterprise in the cement industry. It was founded in 2003. As a pioneer in the South China market, the company successfully seized the golden decade of the domestic cement industry, pioneered high-quality regional distribution, achieved rapid scale growth, and became the leader in the cement market in South China.

The elasticity of the cement sector under the reversal of the profit pattern. In 2023, the company's sales volume was 69.3 million tons, down 8% year on year. Compared with peak sales volume (90.83 million tons in 2020), the decline was greater than that of the whole country, reflecting the company's medium-term strategy of controlling production and stabilizing prices. In 2023, the company's gross profit per ton of cement was 35 yuan, falling below the previous cycle (47 yuan in 2015), and the net profit per ton was minimal (net profit of about 7 yuan per ton at the bottom of 2015). Entering the end of 2024Q2, there was a positive change in the regional market competition mentality. The leading companies are more profit-oriented. Based on this, cement prices in Liangguang experienced a positive recovery; further considering that the company's cement sector was hardly profitable before the price increase, price elasticity is expected to bring high elasticity to the main business under phased improvements in supply and demand.

Actively lay out the aggregates and enter the harvest period. The company's layout in the field of aggregates was later than that of its peers, but it was more aggressive. Beginning in 2020, it continued to win several large-scale mines in the Liangguang region. According to incomplete statistics, the company's aggregate production capacity currently exceeds 0.13 billion tons. In addition, there is also some production capacity under construction. Currently, the company's aggregate layout is gradually moving towards the harvest period. In 2023, the company sold 45.58 million tons of aggregates, with revenue of 1.62 billion yuan, a ton price of 35.4 yuan/ton, a ton cost of 16.2 yuan/ton, and an estimated gross profit of 19.2 yuan/ton. Entering 2024, the scale of aggregates continues to grow rapidly as production capacity is increased. As a state-owned enterprise, the company's past debt ratio was not high; it remained below 50% all year round. By the end of 2023, the company's balance ratio was 37%. Furthermore, the company continues to pay attention to shareholder returns. In the past, the dividend ratio remained above 40% all year round, leading the industry. Even under pressure on profits in 2023, the company's dividend ratio was maintained at 47%, and the mid-term dividend was paid in 2024H1; considering the improvement in the market pattern since 2024Q3, the mid-term company's dividend ratio is highly attractive. Neutral estimates that the company's 2024-2025 performance will be 0.75 or 1.37 billion, corresponding to PE of 14 or 7 times, and a purchase rating.

Risk warning

1. Demand for cement is weak; 2. Market competition intensifies; 3. Epitaxial elasticity is limited; 4. Market concentration is insufficient.