The main reason for losses in the first quarter was the off-season and the price starting point was low

Tianshan Co., Ltd. released its quarterly report, achieving profit attributable to the parent company - 1.23 billion yuan, with both year-on-year and month-on-month losses (1Q22/4Q22 was +1.02 billion yuan/+490 million yuan respectively). Losses in the first quarter were mainly due to 1) the low starting point of cement prices before the 2023 Spring Festival, and 2) the first quarter was a low season within the year, with low sales and high fixed costs. Since the Spring Festival, demand has initially shown a moderate recovery trend, which has led to marginal recovery in cement prices. However, under the influence of rain disturbances and increased production lines, the market has faced phased challenges since the Ching Ming Festival. Industry consensus is still the key to profitable restoration of the cement business. We are optimistic about the consolidation of industry consensus in 2023 and the restoration of cement prices. Tianshan Co., Ltd.'s core profits are highly sensitive to cement prices, and profits are highly flexible. The 2023/2024/2025E forecast remains unchanged at 1.02/1.26/1.31 yuan, and the target price remains unchanged at 11.27 yuan. Based on 11x2023 PE, it is consistent with the historical average for the past 5 years. Keep “buying.”

The volume and price of cement fell year-on-year in 1Q23, and the aggregate business was developing strongly. We estimate that the company sold about 49.7 million tons of cement and clinker in 1Q23, -4.8% year on year, and the decline was narrower than 2022 (-14.4% compared to the same period in 2022). Due to the significant drop in cement prices starting in 2Q22, prices were at a low starting point in 1Q23, falling about 58 yuan/ton to 307 yuan/ton over the same period last year. Considering that the price of coal is basically the same as year over year, we estimate that the gross profit per ton in the cement business also dropped by around 60 yuan/ton year on year. In the context of the company's increased resource acquisition and the gradual release of aggregate production capacity, the aggregate business continued its strong development momentum.

We estimate that aggregate sales were over +40% year over year to 30.42 million tons, which led to strong growth in aggregate business revenue, although prices declined somewhat year over year.

Demand is beginning to recover moderately, and industry consensus is still the key

Since the Spring Festival, although there are still regional and structural imbalances, overall demand has shown a moderate recovery trend, driving cement prices in core markets such as East China and South China to achieve marginal recovery. Since the Qingming holiday, due to more frequent rain disturbances and an increase in the proportion of production lines that have resumed production throughout the industry, the cement market has once again faced the phased challenge of rising inventories and loosening prices. In this environment, industry consensus may still be a key factor in cement price recovery. Recently, some provinces have decided to carry out peak production earlier than in previous years, which shows that industry consensus is being forged and that the industry's ecology is generally healthy.

Plans to issue convertible bonds to support resource-side optimization and upgrading

The company announced on April 20 that it plans to raise no more than 10 billion yuan through the non-public issuance of convertible bonds, of which 65%/6%/29% is planned for aggregate project construction/cement production line upgrade/capital structure improvement. We believe that improving quality and efficiency and optimizing upgrades is the long-term driving force for the company's development. Among them, improving quality and efficiency on the resource side is one of the keys. Despite the uncertainty, if the release is completed, we expect it will help better support the company to make up for shortcomings and cultivate new growth poles.

Risk warning: Real estate policies are stricter than expected, and industry consensus is weaker than expected.