In the first half of 2023, the company's revenue and profit declined year over year under a high base. We expect that the company's profit in a single quarter has recovered from the bottom. There is little risk of a further sharp decline in profits in the cement industry next year. It is recommended to focus on the marginal changes in the industry that may be brought about by the transformation of urban villages and supply-side reforms, as well as the company's international development process. Maintain a “buy” rating.

Matters: The company released its 2023 annual report. 2023H1 achieved revenue of 53.443 billion yuan, a year-on-year decrease of 18.36%; net profit of 142 million yuan, a year-on-year decrease of 95.94%; net profit after deducting non-return net profit of 410 million yuan, a year-on-year decrease of 113.83%. Equivalent to 2023Q2, the company achieved revenue of 31.064 billion yuan, a year-on-year decrease of 16.49%; net profit of 1,373 billion yuan, a year-on-year decrease of 44.33%; net profit of non-return net profit of 1,017 billion yuan, a year-on-year decrease of 50.62%.

In the first half of the year, prices of various products and profit per ton declined year-on-year under a high base. In the first half of the year, the company's revenue and profit declined significantly year on year, mainly due to the high price of various products and the profit base per ton in the same period last year. We estimated that for cement and clinker in the first half of the year, sales volume was 122 million tons, down 4% year on year, ton price was 300 yuan, down 13% year on year, gross profit per ton was 43 yuan, down 32% year on year, net profit per ton (excluding effects of inter-branch offsets) was -5.1 yuan, down 125% year on year; in terms of aggregates, sales volume was 63 million tons, up 26% year on year, ton price was 41 yuan, down 16% year on year, gross profit per ton was 15 yuan, down 34% year on year, and net profit per ton (not excluding the impact of partial offsets) was 8.7 yuan, a year-on-year decrease of 36%.

We expect the company's single-quarter profit to have recovered from the bottom. The net profit of 2022Q3, Q4, and 2023Q2 companies after deducting non-attributable net profit was 0.1, -2.7 billion yuan, and 1.02 billion yuan respectively. Regardless of the seasonal factors of Q1, the company's profit in a single quarter has recovered from the bottom. And judging from the supply and demand situation in the industry, we think the cement industry is already in the bottom of this year's Q2/Q3. On the one hand, cement demand has achieved a state of basic stability year-on-year; on the other hand, competition among cement companies has shown a relatively market-based state, which means that the Q2/Q3 industry has had less excess profit from the competitive pattern. This is reflected in the fact that the industry's overall falsed-peak production execution effect in the second quarter was weak. After entering a low demand season from June, the cement coal price gap gradually fell back to slightly lower than the same period last year, and close to the same period in 2015 and 2016. There are situations where cement prices have fallen below the enterprise cost line in many regions.

We anticipate that the risk of a further sharp decline in profits in the cement industry next year is low. We will focus on the marginal changes in the industry that may be brought about by the transformation of urban villages and supply-side reforms, and the company's international development process. Considering that demand for cement is still expected to be stable over the next few years, that there is limited room for the competitive landscape to deteriorate further compared to this year, and that the first half of last year had a high impact on prices and tonnage profits, we expect the risk of another sharp decline in the cement industry's profits next year similar to this year's. In the future, urban village reform is expected to drive demand side growth in the cement industry, and possible supply-side reforms, with integrated measures such as dual carbon, mergers, acquisitions, and hosting of large enterprises as the main starting point, are expected to improve the competitive pattern of the industry. Furthermore, the company's international development is expected to become one of the future business support points. According to the company's announcement, the subsidiary regional company Sinoma Cement has completed the divestment of domestic cement assets and is focusing on international business expansion. In 2023, it will actively conduct market research, simultaneously establish an international investment and operation management system, and accelerate the layout of international business.

Risk factors: Demand for cement will decline further sharply in the short term; the competitive landscape in the cement industry will worsen further; the company's non-cement business will fall short of expectations; and the company's asset impairment losses will exceed expectations.

Profit forecast, valuation and rating: Considering that demand and profit recovery in the cement industry since the second quarter of 2023 fell short of expectations at the beginning of the year, we adjusted the 2023-2025 profit forecast to $28.02/35.73/4.362 billion yuan (the original forecast was 18.620/92.05/11.796 billion yuan. In the original forecast, we considered the influencing factors that China Building Materials, the majority shareholder in 2023, may need to fulfill 2021-2023 performance compensation promises, and are now excluded from the forecast). Considering that 1xPB is one of the important benchmarks for measuring corporate valuations, and is lower than 1.3 xPB, the company's valuation center in the past three years, we gave the company 1xPB in 2023, corresponding to a target price of 9.5 yuan, and maintained a “buy” rating. Furthermore, although we have not yet considered the impact of China Building Materials's performance compensation commitments in our forecasts, we expect the future to reflect an increase in capital reserves in 2024, which will result in an increase in net assets per share.