China Resources Building Materials Technology released its three-quarter report. Net profit for the first quarter of 2024 was 0.309 billion yuan, or -51.6%; the 3Q24 quarter net profit was 0.143 billion yuan, +74.5% year over year, which established a year-on-year inflection point in profit, in line with the profit forecast issued on October 14 (the forecast implied that net profit from 3Q24 was 0.108-0.172 billion yuan). The recovery of cement prices in the Liangguang region was interrupted in September, but since October, it has regained the upward trend, and prices are expected to continue to rise as the dry water period in the Xijiang River approaches. As a leading cement company in South China, we believe the company can benefit from the restoration of the profit center brought about by the easing of competition in the regional market. Maintain “buy-in.”

The strategy to control the volume and increase the price of cement continues to be effective

The company sold 14.91 million tons of cement clinker in 3Q24, -16.2% year over year. The decline was larger than 1H24 (-2.0%), reflecting the company's strategy of putting more emphasis on volume control and price increases since June. The average price of 3Q24 cement clinker (ASP) was 237 yuan/ton, or -8/+4 yuan/ton compared to the previous month. Gross profit per ton is 32 yuan/ton, +12/+2 yuan/ton compared to the same period last month. The continued month-on-month recovery of ASP and gross profit laid the foundation for the establishment of a year-on-year inflection point in profit. Sales of commercial blends and aggregates were outstanding in 3Q24. Among them, commercial mixed sales were +33.8% to 3.24 million square meters, and aggregate sales were +30.4% YoY to 16.79 million tons. However, the gross profit per ton is under pressure. Among them, the gross profit of the commercial mixed party was 39 yuan/square, or -9/-2 yuan/square; the gross profit per ton of aggregate was 13.1 yuan/ton, or -6.9/-2.6 yuan/ton.

The approaching dry water period in Xijiang is conducive to the continued restoration of cement prices in Liangguang

Due to frequent typhoons in September, the restoration of cement prices in the Liangguang region was interrupted. The average price for the month fell by 22 yuan/ton compared to August. However, since October, the previous trend has resumed. As of October 25, the average price in the Liangguang region since October was 10 yuan/ton higher than in September. As the dry season of the Xijiang River approaches, mutual interference between the Guangxi and Guangdong markets is expected to decrease, which is conducive to easing market competition and further recovering regional market prices. Due to the large number of new production capacity built in Guangxi in 2021-2023, the implementation of false peak production by local enterprises is still the key to the pace of price restoration in the regional market.

Profit forecasting and valuation

We lowered the cement clinker sales assumption, lowered 2024 tons gross profit (delayed price increase window due to the September typhoon), raised the 2025-2026 tonne gross profit, combined with the higher cost assumptions, we lowered the company's 2024/2025/2026 EPS by 20.7%/9.4%/5.2% to 0.11/0.13/0.14, respectively, and the target price by 5.9% to HK$3.53, based on 0.51x2024 P/B (BVPS: 6.37 yuan), compared to 1SD since listing The net market ratio was 20% lower 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.