Hailuo Cement released its three-quarter report. Net profit for the first three quarters was 5.2 billion yuan, or -40.1% YoY; 3Q24 had a net profit of 1.87 billion yuan, -14.9% YoY, which was weaker than market expectations (Visible Alpha's agreed forecast: 2.12 billion yuan). After deducting the effects of exchange gains and losses and changes in fair value, the 3Q24 core net profit for the 3Q24 quarter was 1.71 billion yuan, -29.8% year-on-year. We believe that the increase in the performance and cost ratio of the non-cement business is the main reason why 3Q24 earnings were weaker than expected. The consensus on erroneous production in the cement industry is being further consolidated, and the supply-side's ability to repair profits has been enhanced. As steady growth policies are strengthened, the demand side is also expected to form a stronger synergy in 2025. The company has leading competitiveness, a strong balance sheet, and maintains “buying”.

Tons of gross profit stabilized during the off-season, and cost rates increased

3Q24's cement clinker sales volume was 69.5 million tons, or -5.5% year on year. The gross profit per ton was 54 yuan/ton, and the gross profit per ton was 54 yuan/ton, which maintained a month-on-month stability during the low season of industry demand; -6 yuan/ton year on year, and the decline was significantly narrower than 2Q24 (-35 yuan/ton year on year). The comprehensive cost ratio was 12.0%, +3.5/1.5pp compared to the same, and 39 yuan/ton of folding cement clinker, which was stable year over year, and +3 yuan/ton compared to the previous month. Net cash after deducting interest-bearing debt was $46.5 billion, +7.2/ 4.2% YoY, and the balance sheet was further strengthened.

Profitability is expected to accelerate further

Since 4Q24, the rise in cement prices has accelerated thanks to the industry's consensus to implement false peak production.

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. In the context of preventing “internal rolling” vicious competition, we expect supply-side optimization to progress in more dimensions other than erroneous production. As the steady growth policy is further strengthened and implemented, the demand side is also expected to move in the opposite direction from the supply side and play a more positive role.

Profit forecasting and valuation

Taking into account lower sales assumptions, higher gross margin assumptions and expense ratio assumptions, we will reduce EPS by 1.9% in 2024, increase the 2025/2026 EPS by 4.1%/3.4%, respectively, and 2024/2025/2026 EPS to 1.72/1.93/2.09 yuan, respectively, based on the higher gross profit per ton assumption. The target price of Conch Cement-A/H was raised by 23.6/14.8% to HK$33.15/32.03, respectively, based on 0.9/0.8 x 2025 P/B (BVPS: $36.8), which is one standard deviation lower than the average P/E since 2011, to fully take into account that cement demand is entering an adjustment period.

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