2022 results in line with our expectations

Jidong Cement announced its 2022 results: Revenue fell 4.9% YoY to Rmb34.54bn, and attributable net profit fell 51.7% YoY to Rmb1.36bn. In 4Q22, revenue fell 29% YoY to Rmb7.19bn, and the attributable net loss was Rmb277mn. The firm's 2022 results are in line with our expectations.

Sales volume declined, largely in line with the industry decline. Jidong’s clinker sales volume slid 12.9% YoY to 86.88mnt in 2022. Cement output in northern and northeastern China declined 11.8% and 19.7% in 2022, largely in line with the decline in the firm's sales volume.

Per tonne ASP rose YoY. The ASP of clinker rose Rmb20 YoY (6%) in 2022 to Rmb340/t, as cement prices in northern China remained high YoY in 1H22.

Per tonne gross profit and net profit declined. In 2022, the gross profit of clinker fell Rmb17 YoY (down 20.3% YoY) to Rmb68/t. Attributable net profit per tonne fell Rmb12.6 YoY to Rmb15.6/t.

Expense ratio grew. The firm's selling, G&A, and financial expense ratios fell 0.1ppt, and rose 0.7ppt and 0.1ppt YoY in 2022.

Debt-to-asset ratio rose. The firm's debt-to-asset ratio rose 3.4ppt YoY to 47.4% at end-2022.

2023 business plan: The firm plans to generate revenue of Rmb36bn in 2023.

Trends to watch

Demand in northern China gradually recovers; industry sentiment to improve in 2023. The cement market in northern China began recovering following the 2023 Chinese New Year holiday (January 21-27). As of March 24, the cement shipment rate in the Beijing-Tianjin-Hebei region reached 70% and averaged 33% in 1Q23 (up 13ppt YoY), implying a steady recovery in demand. Regional clinker inventories are also at a moderate level, thanks to the well-implemented peak-shifting production in the winter. As the decline in demand from the real estate industry narrows and the construction of infrastructure projects increases, we expect cement demand to recover marginally and industry-wide supply and demand conditions to improve.

We expect the firm's earnings to improve on a quarterly basis and its full-year earnings to recover coupled with a potential mild decline in coal prices.

Optimization of regional landscape underway. Jidong announced that it has established a joint venture with Xinjiang Tianshan Cement in Liaoning province with a capital contribution of Rmb900mn (50% stake) and had consolidated the JV into the firm's financial statements. We expect the JV to take the lead in the northeastern Chinese cement market, support the integration of the local market and the development of an industry ecosystem, improve the medium-to-long-term market environment in the region, and significantly increase the firm's operating efficiency there.

Financials and valuation

Given possible recovery in sector supply and demand, we raise our 2023 attributable net profit forecast 19.9% to Rmb2.00bn to reflect our higher sales volume and per-tonne earnings assumptions, and introduce our 2024 attributable net profit forecast of Rmb2.30bn. The stock is trading at 11.5x 2023e and 9.9x 2024e P/E. Maintain OUTPERFORM. Considering the company's results in 1Q23 may still be under pressure, we keep our target price unchanged at Rmb9.9 (implying 13.2x 2023e and 11.4x 2024e P/E), offering 15% upside.

Risks

Disappointing demand recovery; sharper-than-expected rise in costs.