Incident: The company released its 2024 mid-year report, achieving revenue of 45.566 billion yuan, a year-on-year decrease of 30.44%, and net profit to mother of 3.326 billion yuan, a year-on-year decrease of 48.56%; of these, revenue for the second quarter was 24.238 billion yuan, down 28.92% year on year, and net profit to mother was 1.823 billion yuan, down 53.40% year on year. The performance was in line with expectations.

Sales and profits declined in the first half of the year due to sluggish demand in the industry. The cement business continues to be under pressure. In the first half of the year, due to the continued slump in new domestic real estate construction and chemical debt in some regions, downstream domestic demand for cement was weak. The country's cement production was 0.85 billion tons, down 10.0% year on year.

The growing contradiction between supply and demand has intensified market competition. 2024H1's cement clinker sales volume was 0.126 billion tons, a year-on-year decrease of 3.35%; self-product sales revenue was 33.579 billion yuan, a year-on-year decrease of 20.82%; self-product sales costs were 25.853 billion yuan, a year-on-year decrease of 15.76%; and the comprehensive gross margin of self-product was 23.01%, down 4.62 percentage points from the same period last year. Looking at the tonnage index, we estimate that 2024H1's comprehensive tonnage revenue of cement and clinker was 240 yuan, down 66 yuan; the tonnage cost was 188 yuan, down 36 yuan; the gross profit per ton was 52 yuan, down 30 yuan; and the net profit per ton was 26 yuan, down 23 yuan from the previous year. Aggregate and commercial revenue bucked the trend, and gross margin declined. The company continued to develop its non-cement business. 2024H1's aggregate and mechanical sand revenue was 2.191 billion yuan, up 29.84% year on year, and the comprehensive gross margin was 47.84%, down 9.71 percentage points year on year; commercial concrete revenue was 1.178 billion yuan, up 20.60% year on year, and the comprehensive gross profit margin was 8.42%, down 4.20 percentage points year on year.

The fee rate has increased. The company's expense ratio for the first half of the year was 9.53%, up 2.37 percentage points from the previous year. Among them, sales, management, R&D, and finance expenses were 3.43%, 5.93%, 1.14%, and -0.97%, respectively, up 0.94, 1.13, 0.02, and 0.28 percentage points respectively, which is expected to be mainly due to the decline in revenue.

It has allocation value under the DCF valuation method. As profit pressure in the cement industry increases, the trend of “competition” has reappeared, making the market's judgment on the bottom profit center of the industry gradually clear. According to our previous in-depth report estimates, compared to the intrinsic value of Conch in the DCF valuation method under the assumption of a sustainable and complete competitive pattern for the entire industry, the current market value has allocation value. We believe that the current market offers discounts mainly because the company maintains a large amount of cash on hand over a long period of time based on strategic considerations (about 67.8 billion yuan in monetary capital as of Q2), but has not carried out mergers and acquisitions or cash dividends, and the return on capital is low. We judge that the current implied dividend rate of Conch Cement is close to 4%. In the context of the market value assessment of central state-owned enterprises, the probability of cash dividends in hand may be revised, and the company's reasonable market value is expected to move closer to DCF pricing.

Profit forecast and valuation: We maintain the 2024-2026 net profit forecast of 8.376, 9.292, and 10.327 billion yuan, corresponding to the stock price PE on August 27 at 13X, 12X, and 11X, respectively. Maintain an “Overweight” rating.

Risk warning: macroeconomic recovery falls short of expectations, non-cement business progress falls short of expectations, raw material prices fluctuate