The large year-on-year decline in the company's profit in the first half of the year was mainly due to the high base of the cement and glass fiber business. We believe that the fundamentals of all major businesses have now bottomed out or are rising steadily. Moreover, as the profit share of basic building materials is already low, the growth of the new materials and engineering technology service sectors is expected to be further reflected. As a comprehensive materials platform, the company's steady growth has increased, and it has high dividends. Maintain a “buy” rating.
The company announced the 2023 interim report. At 2023H1, the company achieved revenue of 102,374 billion yuan, a year-on-year decrease of 6.05%, and a year-on-year net profit of 1,404 billion yuan, a year-on-year decrease of 74.23%. Equivalent to 2023Q2, the company achieved revenue of 58.232 billion yuan, a year-on-year decrease of 1.42%, and net profit of 1,932 billion yuan, a year-on-year decrease of 47.00%.
The large year-on-year decline in profit was mainly due to the high base of the cement and glass fiber business. Prices and tonnage profits of cement and glass fiber were both high in the first half of last year. Judging from the consolidated subsidiaries corresponding to the business, in the first half of the year, the net profit of Tianshan Co., Ltd. fell 96% year on year, the net profit from Sinoma Technology dropped 26% year on year, and the net profit of Jushi China, which contributed to investment income, fell 51% year on year.
All major business fundamentals have bottomed out or are rising steadily.
1) Basic building materials: The cement floor is recovering, and the company is promoting cost reduction, aggregates, and internationalization. Considering that demand for cement is expected to be relatively stable within the next few years, that urban village renovation is expected to marginally support demand, and that there is limited room for the competitive landscape to deteriorate further compared to this year, we expect that next year there is less risk that the cement industry's profits will experience another sharp decline similar to the sharp decline since this year. The company continues to promote the transformation and cost reduction of cement production lines and the internationalization of aggregate business, which is conducive to supporting the stability of the cement business.
2) New materials: The glass fiber cycle has bottomed out, and the rest of the main materials are growing steadily. We judge that glass fiber is already at the bottom of the industry cycle. Historically, demand growth in the glass fiber industry has been steady. Although it is related to macroeconomic fluctuations, it only declined during extreme situations such as the financial crisis. However, the differentiation between supply-side leaders and small and medium-sized enterprises is becoming more obvious, and the supply pattern is expected to improve. In the first half of the year, major new material categories such as gypsum board, wind power blades, lithium battery separators, waterproofing, and carbon fiber all achieved positive year-on-year growth through measures such as product structure upgrades, expansion, and cost reduction. Looking ahead, we also expect growth momentum.
3) Engineering technology services: Business transformation drives continuous growth. In recent years, Sinoma International, the main entity, has begun a transformation from engineering services to a combination of engineering services, equipment manufacturing, and operation and maintenance services, opening up room for growth and improving profitability and business quality. In the first half of the year, Sinoma International completed the restructuring of the fertilizer hospital, and GuiMu's net profit increased by 30% over the same period last year. Under the same caliber, if the impact of exchange losses is excluded, we estimate that net profit at the parent level increased 14% year-on-year, reflecting growth.
The profit share of basic building materials has declined, the company's steady growth as a comprehensive materials platform has increased, and it has high dividends. We predict that if costs at the parent company level are shared according to each sector's share of net profit, the share of net profit from the infrastructure materials sector may drop to about 25% in 2023. The impact of fluctuations on the company as a whole is expected to be further reduced, and the growth of the new materials and engineering technology service sectors is expected to be further reflected, supporting the steady growth of the company as a whole. Furthermore, we predict that the company's dividend rate for 2023-2025 will be 8.0%/10.3%/12.9% (based on current prices), and shareholder returns are safe to some extent.
Risk factors: Demand and price stability in the cement industry fell short of expectations, causing the cement business to fluctuate greatly; the development of the non-cement business fell short of expectations; the scale of impairment of the company's assets increased dramatically; the scale of the company's capital expenditure was too large or the results fell short of expectations.
Profit forecasting, valuation and ratings: Currently, all major business fundamentals have bottomed out or are rising steadily, and as the profit share of basic building materials declines, the growth of the new materials and engineering technology service sectors is expected to be further reflected. The company's steady growth as a comprehensive materials platform has increased, and it is expected to maintain high dividends. We maintain the company's net profit forecast of RMB 6384/82.69/10.338 billion yuan for 2023-2025. According to the company's PE valuation center in the past five years, we will grant 6xPE in 2023, corresponding to HK$5.3. Maintain a “buy” rating.