Key points of investment

The company disclosed its 2024 three-quarter report: operating revenue/net profit to mother was 68.15 billion yuan/5.198 billion yuan in the first three quarters, or -31.3%/-40.1% year-on-year. Operating revenue/net profit to mother was 22.585 billion yuan/1.873 billion yuan in the third quarter, -32.9%/-15.1% year-on-year.

Q3 Domestic demand weakened, and cement profits continued to bottom out. (1) In Q3, due to factors such as extreme weather and tight downstream capital, slowing infrastructure construction progress, and declining real estate investment, the country's cement production fell 10.7% year-on-year in January-September. The cumulative decline was 0.7 pcts higher than in the first half of the year. Q3 Continued weakness in demand affected the effects of the industry's erroneous peak self-regulation measures. Industry competition was repeated, and the price bottom fluctuated. The company's sales volume is expected to decline year on year, but the decline is better than the industry average, reflecting comprehensive competitive advantages such as cost. (2) The gross margin in Q3 was 20.8%, up 4.6 pct year on year and 0.8 pct month on month. The year-on-year increase in gross margin is expected to be mainly due to a decline in the share of low gross profit trade business. It is estimated that the gross profit ratio of cement tons in a single quarter is still low month on month. It is mainly affected by weak demand and market competition. (3) The company's total expenses decreased by 9.6% year-on-year during the Q3 period, reflecting significant cost control results. (4) The company's net sales margin for Q3 was 8.2%, which was clearly superior to the overall level of the industry. The net sales margin was +1.5pct year over year and +0.4pct month-on-month. We estimate that the net profit for Q3 cement tons is still at the bottom of history.

Capital expenditure continued to slow during the downturn of the industry, and debt ratios remained stable. (1) The company's net cash flow from operating activities in the first three quarters was 10.348 billion yuan, +7.2% year over year, superior to profit performance, mainly due to the reduction in bills receivable and accounts receivable. (2) Cash payments for the purchase and construction of fixed assets, intangible assets and other long-term assets in the first three quarters were 8.424 billion yuan, or -10.8% year-on-year, reflecting the company's continued control of capital expenses during the downturn in the industry. (3) The company's three-quarter balance ratio/debt with interest was 21.5% /30.664 billion yuan, compared to the 2024 mid-year report, +2.0pct/+5.54 billion yuan, respectively, mainly due to the company's green building materials and new energy projects.

The effects of strengthening self-discipline in the industry are showing. Q4 profits are expected to improve significantly. In the medium to long term, it is expected that policies will accelerate supply-side clean-up. Against the backdrop of extensive industry losses in the first half of the year, industry self-discipline improvements laid the foundation for a boom rebound. Combined with the optimization of the false peak plan and the steady recovery in physical demand, led by leading companies, the implementation of false peak effects and price increases, represented by the riverside region, improved markedly. The sustainability of the cement price rebound will be better than in the first three quarters, and the average price in the East China and South China markets, where the company's production capacity is concentrated, is expected to rebound significantly. The strength of the medium-term fiscal policy is also expected to support physical demand to stop falling and stabilize, and facilitate the continuous improvement of the industry competition order. The cement industry is expected to be included in the national carbon market by the end of the year. Combined with the further introduction of industrial policies, it is expected to accelerate industry integration and the elimination of excess capacity in the medium to long term.

Profit forecasting and investment ratings: The company demonstrated comprehensive advantages such as cost leadership during the downturn, and the expansion of the industrial chain provided new growth momentum. Currently, the cement sector's net market ratio valuation is at the bottom of history. As industry self-discipline improves, the valuations of leading companies are expected to recover. We temporarily maintained the company's net profit from 2024-2026 to 8.35/9.74/11.21 billion yuan, with a corresponding price-earnings ratio of 17/14/12 times, maintaining the “incremental” rating.

Risk warning: the decline in cement demand exceeds expectations; the upstream and downstream expansion of the industrial chain falls short of expectations; the risk of increased market competition.