Tianshan Co., Ltd. released its three-quarter report. In the 2024 Q3, it achieved revenue of 21.76 billion yuan, net profit to mother of -0.334 billion yuan, a month-on-month loss reduction (2Q24: -1.49 billion yuan), which was lower than our expectations (-0.049 billion yuan), mainly due to the fact that 3Q24 sales declined more than expected, and the time window for price increases during the peak season was somewhat backward. Since October, cement prices across the country have been recovering at an accelerated pace. Considering that the company's profit is highly sensitive to cement prices, we expect the company's profit improvement in 4Q24 to be significant, and the loss will be reversed throughout 2024. Maintain a “buy” rating.

Tons of gross profit continued to improve month-on-month, contributing to a month-on-month loss reduction in 3Q24

The company sold 59.27 million tons of cement clinker in 3Q24, -20% year-on-year. The decline was greater than the country's cement production during the same period (-12% year over year), reflecting the company's determination to lead erroneous production and promote price restoration in the industry. The average sales price (ASP) of 3Q24 cement clinker (ASP) is 242 yuan/ton, which is basically the same from month to month. Taking into account changes in cost factors such as coal prices, we estimate the company's gross profit of 3Q24 tons at 39 yuan/ton, +6 yuan/ton compared to the previous month. While sales continue to be under pressure, the further improvement in gross profit per ton from month to month was the main reason why the company achieved a month-on-month loss reduction in 3Q24.

The recovery in cement prices has accelerated since October

Thanks to the industry continuing to resolutely implement erroneous peak production during the peak demand season, the restoration of cement prices has accelerated markedly since October. As of October 25, the national average price since October was 412 yuan/ton, 23/22 yuan/ton higher than September/3Q24, respectively. On October 25, clinker in the Yangtze River Delta rose again by 30 yuan/ton, which is expected to continue to drive the restoration of cement prices across the country. The company's profit is highly sensitive to cement prices. According to our estimates, every 10 yuan/ton increase in the average price of 4Q24 is expected to increase the company's net profit of about 0.37 billion yuan during the quarter. In the context of the accelerated restoration of cement prices across the country, we expect the company to reverse losses throughout 2024.

The cement industry is expected to see improvements on both the supply and demand sides in 2025, and the price of Heli cement has gradually recovered since the end of 2Q24. It mainly relies on industry self-regulation measures such as erroneous production, and the overall demand side is still under pressure. However, as ministries, departments, and local governments gradually refine and implement measures related to countercyclical adjustment after the September 26 Politburo meeting, we believe that the demand side is expected to see more positive changes in 2025, thus forming a synergy between supply and demand to support further steady improvement in industry profits.

Profit forecasting and valuation

Based on lower sales assumptions, but higher gross margin assumptions, we raised the company's 2024/2025/2026 EPS by 0.6%/12.1%/9.2% to 0.06/0.28/0.33 yuan, respectively, and raised the target price by 2.2% to 8.82 yuan, based on 0.72x2025 P/B (BVPS: 12.25 yuan), a 20% discount over the average P/B since 4Q21 to reflect the challenges faced by demand in the medium to long term.

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