2020 revenue/net profit attributable to the mother was -1.6%/-13.4% year-on-year. Large exchange losses and impairment dragged down performance. The dividend ratio was maintained and special dividends were paid as scheduled. The volume and price of cement increased and fell in 2H20, and the weather disrupted the pace of price increases. Aggregates and commercial concrete bucked the trend and recorded good growth. Costs are managed properly, but the cost reduction is less than the price drop, and gross profit per ton has declined somewhat. Production materials from domestic and overseas production lines have gradually contributed to the increase in cement, and aggregate and commercial concrete materials have maintained a good development. Considering factors such as support requirements for major infrastructure projects in the company region, high coal prices year over year, and financial leasing business dragging down report quality, we lowered our net profit forecast for 2021-2022 to $1,99/2.15 billion (the original forecast was $2,36/2.54 billion), adding an additional $2.26 billion to the 2023 net profit forecast. The PE corresponding to the current price is 3.2x/2.9x/2.8x. Considering historical valuations and comparable company levels, we gave the company 0.75 times PB in 2021. The target price was lowered from HK$2.20 to HK$1.89 to maintain the “buy” rating.
Revenue/net profit attributable to the mother in 2020 was -1.6%/-13.4% year on year. The performance fell short of expectations due to large exchange losses and impairment, and the dividend ratio was maintained as scheduled and special dividends were paid. The company's 2020 revenue was 7.13 billion yuan, -1.6% year on year; gross profit was 2.34 billion yuan, -4.0% year on year; and net profit of the mother was 1.56 billion yuan, -13.4% year on year. The performance was lower than expected. The performance was lower than expected, mainly due to large exchange losses and impairment charges during the period. By product, the revenue of cement/aggregate/commercial concrete in 2020 was 59.0/13/71 billion yuan (-5.8%/+69%/+45%), gross profit of 19.6/0.6/140 million (-13.1%/+55%/+50% compared to the same period). The epidemic and weather disrupted the volume and price performance of cement, while aggregates and commercial concrete bucked the trend. The company plans to pay a year-end dividend of 0.086 yuan/share (the corresponding dividend rate of 30% is in line with expectations) and a special dividend of 0.034 yuan/share. The total dividend rate is 42%, and the dividend rate corresponding to the current price is about 10.5%.
The volume of cement increased and prices fell in 2H20. Weather such as rain and cold tides disrupted the pace of price increases, and aggregates and commercial concrete grew relatively well.
1) Looking at sales volume, sales of cement/aggregate/commercial concrete were 19.6 million tons/3.44 million tons/1.57 million square meters in 2020, +4.3%/+73.7%/+74.4%, of which 2H20 cement sales were +9.8% year-on-year to 11.36 million tons. Cement sales recovered after 3Q20 rushed construction; benefiting from the gradual development of production capacity, aggregates and commercial concrete grew well. Looking at prices, the price of a ton of cement in 2020 was 301 yuan (-32 yuan/ -9.6% year on year), of which the price of 2H20 tons was 291 yuan (-35/-24 yuan year-on-month respectively), disrupting the pace of price increases due to weather disturbances. 2) Looking at the subregion, in 2020, Guanzhong/Shaanan/Xinjiang/Guizhou cement sales were 855/770/204/1.33 million tons, respectively, +11.3%/-4.5%/+14%/+3.1%; tonne prices in various regions were 294/291/406/240 yuan, -7.8%/-12.6%/-7.7%/-8.7%/-8.7%/-8.7%. With the exception of southern Shaanxi, sales increased, while sales prices fell in all regions.
Costs are managed properly, but the cost reduction is less than the price drop, and gross profit per ton has declined somewhat. Looking at costs, the cost of cement tons in 2020 was 201 yuan (-12 yuan/ -5.6% year on year), of which raw materials/coal/electricity/depreciation/other costs were about 56/53/31/31/30, about -2%/-10%/-7%/+2%/-10% year on year. Lower coal prices and improved energy efficiency and cost management led to improvements in ton costs; reflected in gross profit, gross profit of cement tons in 2020 was 100 yuan (-20 yuan/ -16.7% year-on-year), of which the gross profit of 2H20 tons was 93 yuan (-23- /-23/- month over month respectively) 17 yuan).
Gross margin declined slightly, foreign exchange and impairment losses dragged down performance, and operating cash flow improved. The gross profit margin in 2020 was 32.8% (-0.9 pct year on year); the cost rate for the period was -0.6pct to 4.6% year on year, of which the sales/management/finance expenses ratio was 0.9%/4.1%/-0.4%, +0.1/-0.8/+0.1pct year on year, and the overall cost control was good. Exchange losses in 2020 were $150 million ($0.2 billion in the same period last year), mainly due to exchange rate conversion of Tanzanian business accounts; impairment losses accrued in 2020 were $130 million ($0.4 billion in the same period last year), mainly due to accounts receivable and financial leases accruing bad debts. In terms of cash flow, the net inflow of operating cash was 2.70 billion yuan (+3.4% year-on-year); the net outflow of investment cash was 3.12 billion yuan (net outflow of previous year was 2.001 billion yuan); net inflow of fund-raising cash was 320 million yuan (net outflow of the previous year was 770 million yuan).
Production materials from domestic and overseas production lines have gradually contributed to the increase in cement, and aggregate and commercial concrete materials have maintained a good development. The company's production lines for Xinjiang Moyu (4,500 tons per day) and Mozambique (5,000 tons per day) were put into operation in December 2020. At the same time, the company acquired Kangding Paomashan Cement (2,500 tons per day) in August 2020. We expect domestic and overseas production capacity to contribute to the company's cement business; the company's current aggregate and commercial concrete production capacity is 15.1 million tons/9.8 million square meters, and the capacity utilization rate in 2020 is 23%/16%. With the gradual development of production capacity, we believe that aggregate and commercial concrete will continue to develop well in the medium term.
Risk factors: major infrastructure projects fall short of expectations; aggregate and commercial concrete production falls short of expectations; rain and weather disturbances, etc.
Investment suggestions: Considering factors such as the support demand for major infrastructure projects in the company region, the year-on-year high coal prices, and the financial leasing business dragging down report quality, we lowered the 2021-2022 net profit forecast to 19.5/2.15 billion yuan (the original forecast was 2,36/0.39 yuan), the corresponding EPS forecast was 0.36/0.39 yuan (the original forecast was 0.43/0.47 yuan), and the net profit forecast for 2023 was 2.26 billion yuan (corresponding to the EPS forecast of 0.42 yuan). The current price corresponds to PE 3.2x/ 2.9x/2.8x Considering historical valuations and comparable company levels, we gave the company 0.75 times PB in 2021, corresponding target price of HK$1.89 (original target price of HK$2.20), maintaining the “buy” rating.