Preannounced attributable net profit down 65-75% YoY in 1H24

China Resources Building Materials Technology Holdings preannounced 1H24 results: Attributable net profit dropped 65-75% YoY in 1H24, mainly due to YoY declines in selling prices of cement and concrete products. Based on the median of its preannounced earnings in 1H24, we estimate that the firm's attributable net profit fell 70% and 67% YoY to Rmb172mn and Rmb201mn in 1H24 and 2Q24.

Trends to watch

The firm's earnings dropped in 1H24 due to funding pressure, fierce competition, and rainy weather. In 1H24, cement demand in southern China remained weak due to a shortage of funds for downstream projects and frequent rains and floods. The imbalance between supply and demand in the cement industry was prominent, and price competition was intense. As a result, cement sales volume and prices declined in Guangdong and Guangxi - core markets of China Resources Building Materials Technology Holdings.

Data from Digital Cement shows that cement output in Guangdong and Guangxi fell 9.2% and 9.7% YoY in 5M24, and average selling prices of cement in southern China dropped nearly 20% YoY in 1H24. The sharp decline in cement prices weighed on the firm's cement earnings in 1H24. We expect earnings growth of the firm's aggregate project to be affected by market demand and logistics factors.

Prices of cement in southern China remained solid and increased; the firm's earnings to recover in 2H24. Since mid-to-late June, cement prices in southern China have increased twice. Data from Digital Cement shows that cement prices in Guangdong and Guangxi increased Rmb50/t and Rmb60/t at end-June, boosting cement prices in the overall sector and improving the profitability of cement producers. Meanwhile, companies in the two provinces prefer to defend product prices rather than trigger fiercer competition. According to Digital Cement, quotations of leaders in core regions of Guangdong and Guangxi remained stable on July 12.

We attribute the decline in earnings of China Resources Building Materials Technology Holdings in 1H24 to low selling prices and per-tonne earnings. If cement prices remain solid in the slack season, we think demand will likely improve marginally and cement prices may continue to rise when the peak season arrives. We expect the firm's earnings to recover in 2H24 on rising sales volume and prices

Earnings from aggregate business to gradually increase; dividend payout capability to improve in the medium term. As of end-2023, the firm had 92.5mnt of aggregate production capacity in operation. As demand improves in 2H24 and the product mix of the firm's new projects gradually improves, we expect the aggregate sales volume and earnings per tonne of China Resources Building Materials Technology Holdings to improve in 2H24, driving the stable growth of earnings of its aggregate business.

In the medium term, we expect the firm to increase its dividend payout ratio as the firm's aggregate-related capex gradually declines and its operating cash flow and earnings recover. Considering that the firm has maintained a payout ratio of more than 45% in recent years, we believe the potential shareholder return will be considerable if its earnings recover substantially. We expect its earnings to recover in the short and medium term and its dividend payment to stabilize in the medium and long term. The firm is still our top pick in the cement sector.

Financials and valuation

Given solid cement prices in Guangxi and Guangdong and the potential earnings recovery in 2H24, we raise our 2024 and 2025 attributable net profit forecasts 25.9% and 57.3% to Rmb851mn and Rmb1.27bn. The stock is trading at 13.3x 2024e and 9x 2025e P/E. We maintain an OUTPERFORM rating and raise our target price 29.5% to HK$2.5, implying 18.5x 2024e and 12.5x 2025e P/E, offering 39% upside.

Risks

Falling cement prices; disappointing demand recovery