1H24 results largely in line with our forecastsAnhui Conch Cement announced its 1H24 results: Revenue fell 30% YoY to Rmb45.57bn and attributable net profit fell 49% YoY to Rmb3.33bn. In 2Q24, revenue fell 29% YoY to Rmb24.24bn and net profit attributable to shareholders fell 53% YoY to Rmb1.82bn. The firm’s 1H24 results were largely in line with our expectations.

Downward pressure on demand caused sales volume to decline, but degree of decline was much narrower than industry average. In 1H24, China’s cement output fell 10% YoY, as new housing starts continued to drop sharply (down 23.7% over January-June) and the pace of infrastructure construction was slow. In 1H24, sales volume of the firm’s self-produced cement and clinker fell 3.35% YoY to 126mnt, with the decline narrower than the industry average.

ASP of cement and clinker came under pressure due to fierce price competition, and earnings per tonne remained low. We estimate that the ASP of self-produced cement and clinker was about Rmb240/t in 1H24 (-Rmb66/t YoY), and gross profit per tonne fell Rmb30/t YoY to Rmb52/t as costs fell about Rmb36/t YoY (fuel and energy costs fell Rmb29.5/t).

R&D expenses were substantially reduced; overall expense ratio increased. In 1H24, selling, G&A, and financial expense ratios rose 0.87ppt, 0.74ppt, and 0.58ppt YoY, while R&D expense ratio declined 0.16ppt YoY. We think the selling and G&A expense ratio rose due to falling revenue, and the R&D expense fell mainly due to lower investment in intelligent production. We think the rise in financial expense was due to exchange rate fluctuations in financing for overseas projects, resulting in a net foreign exchange loss of about Rmb210mn (vs. net income of about Rmb266mn in 1H23). Excluding the impact of trading business revenue, the firm’s four expense ratios totaled about 12.93% in 1H24, up 1.89ppt YoY.

Cement trading business continued to contract. In 1H24, the firm’s cement and clinker sales volume fell 59% YoY to 1.55mnt.

Aggregate and commercial concrete businesses maintained growth momentum. In 1H24, revenue from the aggregate business rose 30% YoY to about Rmb2.19bn and gross margin stayed high at about 48%; revenue from the commercial concrete business rose 21% YoY to Rmb1.18bn.

Operating cash flow continued to improve. In 1H24, the firm’s net operating cash flow rose 36% YoY to about Rmb6.87bn.

Trends to watch

Earnings to recover in peak season; to weather cyclical downturn backed by competitive strength. We anticipate stronger funding support from special bonds and fiscal policies. Coupled with potential demand recovery during the upcoming peak season, prices may increase and the firm’s earnings per tonne may pick up. In 1H24, we think the industry suffered losses due to low prices. We expect companies in the industry to become more profit-oriented and more willing to cooperate with each other, conducive to price stability. We believe the firm maintains a competitive edge backed by long-standing advantages in market presence, raw material costs, and expense control, and we expect the firm to weather the cyclical downturn.

Financials and valuation

We cut our 2024 and 2025 attributable net profit forecast 15% and 10% to Rmb8.10bn and Rmb9.22bn, as we lower our earnings per tonne assumptions. A-shares are trading at 14x 2024e and 12x 2025e P/E, and H-shares are trading at 10x 2024e and 9x 2025e P/E. We cut our A-share TP 10% to Rmb27, implying 18x 2024e and 15x 2025e P/E, offering 28% upside. We cut our target price for H-shares by 11% to HK$22, implying 13x 2024e and 11x 2025e P/E, offering 29% upside.

Risks

Demand recovery and/or price hikes during peak seasons disappoint.