While CNBM has warned its RMB2bn loss in 1H24 before, the situation was worse than expected as almost every single business line either made loss or suffered earnings decline. We estimate the company to show a profit of about RMB3.2bn in 2H24 mainly on the expected recovery of its cement business. However, we still have to cut our 2024- 26 earnings forecasts by 55-64% given the huge loss in 1H24. We downgrade our call to HOLD as its shares no longer look attractive at 14x 2024E P/E.

Key Factors for Rating

CNBM's RMB2bn loss in 1H24 was a substantial deterioration from a net profit of RMB1.4bn in 1H23. The culprit was the poor performance of the basic building materials segment whose net loss widened from RMB262m to RMB3,230m over the same period given the decline in both sales volume and ASP on weak demand. Unit gross profit of cement and clinker dropped from RMB38/tonne to only RMB16/tonne.

The net profit of new materials segment also dropped 28% YoY to RMB1,379m in 1H24 as most major products, including glass fibre, wind power blades, lithium battery separators, saw lower earnings on decline in product prices.

Looking ahead, we estimate the company to post a net profit of RMB3.2bn in 2H24 mainly on the recovery of its cement operations. Its gross profit per tonne of cement and clinker recovered to RMB40/tonne in June and we expect average to be RMB34/tonne in 2H24. Its new material business also usually sees higher earnings in 2H of a year due to seasonality.

However, the confidence level with our forecast is low. The valuations of its shares are not attractive either.

Key Risks for Rating

Better-than-expected recovery of cement prices.

Recovery in prices of new material products.

Valuation

We slash our target price from HK$4.40 to HK$2.25 given the big cuts in our earnings forecasts. We still set our target price at the average of 6x 2024E P/E and 0.27x 2024E P/B (down from 0.47x previously as derived from the P/B vs ROE regression of its peers). This is equal to 14.1x 2024E P/E.