1Q24 losses widened
Tianshan Co., Ltd. achieved net profit attributable to the parent company of 1.92 billion yuan in 1Q24, and the loss increased year-on-year (1Q23: -1.23 billion yuan), reflecting that profitability is still facing major challenges in the off-season context. The pressure on volume and price of major products was the main reason for the year-on-year increase in 1Q24 losses. We expect that the rebalancing of supply and demand in the industry may take more time, and conditions for a short-term reversal of cement, commercial mix and aggregate prices are still immature. Keep the 2024/2025/2026 EPS forecast of 0.17/0.24/0.29 unchanged, and keep the target price of 8.69 yuan. Based on 0.72x2024 P/B (2024 BVPS: 12.07 yuan), the average P/B discount since 4Q21 is 20% to reflect the challenges of the cement industry. We are optimistic that the company will enhance its overall competitiveness through cost reduction, “cement +” business, and overseas market development. The majority shareholders' impairment compensation and performance promise compensation are expected to enhance the company's shareholders' rights and interests, lay a better foundation for subsequent company development, and “buy”.
Prices of major products have further bottomed out
The company achieved sales of 44.55 million tons of cement clinker in 1Q24, -11.6% year-on-year, which is slightly less than the decline in national cement production during the same period (-11.8% year-on-year). The average price was 232 yuan/ton, year-on-year -74 yuan/ton (-24.3%). Commercial mixed sales stabilized, +7.7% year over year to 1.41 million square meters, but due to a low starting point in early 2024, the average sales price was -70 yuan/square meter (-17.6%) year over year to 325 yuan/square meter. Supply and demand pressure in the aggregate business was initially evident. Sales volume in 1Q24 ranged -6.62% year-on-year to 21.79 million tons, and the average sales price was -3 yuan/ton to 38 yuan/ton year-on-year.
Demand is still challenging. Stabilizing the real estate market is a prerequisite for recovering supply and demand. Infrastructure investment growth is slowing down due to pressure on housing construction investment, and demand for cement is still facing downward pressure. Although the industry's erroneous peak production execution has been good since the beginning of the year, it is still insufficient to fully resolve the conflict between supply and demand. We believe that stabilizing the real estate market is a prerequisite for the restoration of supply and demand. As more Tier 1 and 2 cities further ease restrictions on home purchases, it is worth paying attention to whether the popularity of the real estate market can increase. However, considering the fact that investment in housing construction is lagging behind, we expect that the rebalancing of the supply and demand relationship in the cement industry may still take more time, and the conditions for a short-term price reversal are still not ripe.
Impairment compensation and performance promise compensation are expected to increase shareholders' equity
The company reviewed and approved the impairment compensation plan and performance commitment compensation plan (subject to approval and implementation by the shareholders' meeting). It plans to repurchase 1.55 billion shares from China Building Materials, the majority shareholder, at a price of 1 yuan/share, and cancel the repurchased shares. In addition, the majority shareholders are also required to promise performance compensation of 1.76 billion yuan in cash. After completing the repurchase and share cancellation, the shareholding ratio of public shareholders (all shareholders except China Building Materials) is expected to increase from 15.5% to 18.9%, shareholders' rights will be enhanced, and cash compensation is also expected to provide stronger support for the company's subsequent development, which will help the company enhance its overall competitiveness through cost reduction and quality improvement, “cement +” and internationalization.
Risk warning: Real estate sales are weaker than expected, and erroneous production execution is weaker than expected.