3Q24 results in line with our expectations

Anhui Conch Cement announced its 1-3Q24 results: Revenue fell 31% YoY to Rmb68.15bn and attributable net profit fell 40% YoY to Rmb5.20bn. In 3Q24, revenue fell 33% YoY to Rmb22.58bn, and attributable net profit fell 15% YoY to Rmb1.87bn. The firm's 3Q24 results are in line with our expectations.

Demand remained weak; downward pressure on sales volume continued. According to the National Bureau of Statistics, China's cement output fell 10.7% YoY over 9M24, with output falling 12.4%, 11.9%, and 10.3% YoY in July, August, and September. According to Digital Cement, cement shipment rates in eastern and southern China each fell 11ppt YoY in 3Q24, and we believe the firm's cement sales volume declined in 3Q24 due to stricter control over production in some regions.

We believe prices and earnings per tonne stabilized at bottom; gross margin improved. According to Digital Cement, cement ASP in eastern and southern China fell 2% and grew 2% QoQ in 3Q24, and we believe the firm's cement ASP gradually stabilized at the bottom in 3Q24. We think the firm's cost per tonne and earnings per tonne were largely at the same levels as in 2Q24, given that thermal coal prices stabilized in 3Q24 (compared to 2Q24). In 3Q24, the firm's gross margin rose 4.4ppt YoY and 0.9ppt QoQ to about 19.8%. Given the decline in revenue, we believe the firm may have further reduced the scale of its trade and other businesses.

We believe expenses per tonne were relatively stable. We estimate that the firm's expenses totaled about Rmb2.42bn in 3Q24 (-9.6% YoY), and we believe its expenses per tonne remained stable in 3Q24 on a YoY basis, as the decline in sales volume may be close to the decline in expenses.

Gains from fair value changes translated to profits. As the performance of the securities market rebounded at end-September, the firm's gains from fair value changes reached about Rmb222mn in 3Q24, boosting its earnings growth.

Cash flow continued to improve. In 1-3Q24, the firm's net operating cash flow rose 7% YoY to Rmb10.35bn. The net cash inflow in 3Q24 was Rmb3.48bn.

Trends to watch

The magnitude of price hikes in Yangtze River Delta exceeded market　expectations; product price growth is also expected in southern China; earnings to recover markedly in 4Q24. In our September 29, 2024 report Planned clinker price spike in Yangtze River Delta shows determination to boost price recovery, we stated that the production cuts and price hikes in the Yangtze River Delta and peripheral regions over September-October may have reflected the industry's desire to increase prices, to restore a healthy industry ecosystem, and to maintain reasonable profits. According to recent cement prices that we have been monitoring, the magnitude of price hikes in eastern China is slightly higher than we expected. We expect the firm’s ASP and earnings per tonne to rise markedly YoY and QoQ in 4Q24, and for earnings to recover substantially in the quarter.

Financials and valuation

We keep our 2024 and 2025 attributable net profit forecasts unchanged at Rmb8.10bn and Rmb9.22bn. Anhui Conch Cement A-shares are trading at 17x 2024e and 15x 2025e P/E and H-shares are trading at 13x 2024e and 11x 2025e P/E. We maintain OUTPERFORM ratings for A-shares and H-shares. Considering that the firm’s earnings have dropped to bottom levels and market expectations for the sector have improved, we raise our TP for A-shares by 21% to Rmb32.7, implying 21x 2024e and 19x 2025e P/E, offering 25% upside. We raise our TP for H-shares by 26% to HK$27.7, implying 16x 2024e and 14x 2025e P/E, offering 25% upside.

Risks

Intensifying price competition; sharper-than-expected decline in demand.