China Building Materials released its three-quarter report. 3Q24 achieved net profit to mother (China Accounting Standards) of 1.06 billion yuan, +55.2% over the same period, turning a month-on-month loss into profit; the total net profit from 1-3Q was -0.68 billion yuan, in line with the performance forecast issued on October 15 (forecast 1-3Q total net profit of -0.7 billion yuan). After deducting the impact of one-time items such as fair value changes, asset and credit impairment, and asset disposal gains and losses, the company's total profit for 3Q24 was 2.67 billion yuan, or -13.1/ +14.4% month-on-month, reflecting the company's core profitability recovering quarterly. As cement prices rise at an accelerated pace since 4Q24, we expect the basic building materials sector to become the company's most profitable and flexible business in 4Q24. Increased steady growth policies are expected to ease market concerns about the company's profitability and debt ratio, bring more opportunities for revaluation, and maintain “buying.”

Basic building materials: tons of gross profit continued to recover, 4Q24 profit was elastic

The company sold 67.16 million tons of cement clinker in 3Q24, -26.0% year-on-year, mainly due to: 1. The company continues to lead the industry in false peak production execution; and 2. The consolidated caliber decreased year-on-year; benefiting from moderate price increases and cost reduction, the gross profit for 3Q24 tons was 43 yuan/ton, or +12/19 yuan/ton. In the context of the industry strengthening production at the wrong peak, the restoration of cement prices has accelerated markedly since October 25. As of October 25, the national average price since October was 412 yuan/ton, which is 23/22 yuan/ton higher than September/3Q24, respectively.

The basic building materials business is expected to become the company's most profitable and flexible sector in 4Q24.

New materials: profit decline narrows, product price reinstatement gradually comes to fruition

The overall profit decline in the new materials sector narrowed in 3Q24. The main participants/holding companies Beixin Building Materials/China Jushi/Sinoma Technology 3Q24 achieved net profit of 0.93/0.57/0.14 billion yuan, +8.2/-6.4/ -54.5% year-on-year, and +1.5/+40.1/+19.9pp compared to 2Q24, respectively. The price of fiberglass yarn gradually recovered from 2Q24, and major gypsum board brands also promoted prices one after another at the end of September. As the price recovery of major products deepens, we expect that the month-on-month improvement in profits in the new materials business is expected to continue further.

Engineering and technical services: Revenue and profit were generally stable, and operation and maintenance orders grew strongly, and Sinoma International 3Q24, a core subsidiary in the engineering and technical services sector, had revenue of 10.8 billion yuan, -1.1% year over year; net profit to mother was 0.66 billion yuan, +4.2% year over year. 9M24 Sinoma International Operation and Maintenance Services signed a new business order of 13.1 billion yuan, +36% over the same period, offsetting the decline in domestic engineering technology and equipment manufacturing orders. Overall, 9M24 orders were +1% to 52.8 billion yuan. We believe that strong growth in operation and maintenance service orders is expected to improve the overall profit margin and sustainability of the sector and optimize the sector's profit quality.

Profit forecasting and valuation

Combining lower cement clinker sales assumptions and higher gross profit assumptions, we increased the company's 2024/2025/2026 EPS by 10.0/4.3/ 3.6% to $0.18/0.52/0.60, and raised the target price by 53.4% to HK$4.05. Based on 7.2x2025 P/E, we discounted 20% from the historical average (9.0x) since 2008 to fully consider cement demand.

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