1H23 results miss our expectations

Jidong Cement announced its 1H23 results: Revenue fell 14% YoY to Rmb14.49bn, and attributable net profit plunged 132% YoY to minus Rmb369mn. In 2Q23, revenue fell 22% YoY to Rmb9.30bn, and attributable net profit dropped 69% YoY to Rmb423mn. The 1H23 results missed our estimates.

Sales volume rose markedly YoY due to low base. In 1H23, the firm's clinker sales volume grew 14.4% YoY to 43.96mnt, due to a low base in 1H22. The firm's clinker sales volume was stable in 1H23 and was largely on par with the average level over 2018–2021.

ASP per tonne under significant pressure due to fierce price competition. Due to a slow demand recovery, the cement industry saw supply-demand imbalance and a significant price decline in the northern China market. In 1H23, ASP of the firm’s clinker fell Rmb84/t YoY to about Rmb281/t.

Cost decline had positive impact; decline in gross profit per tonne was narrower than that in ASP per tonne. We calculate that ASP of thermal coal fell by more than Rmb150/t YoY in 1H23, leading to lower cost per tonne. The significant YoY growth in the firm’s sales volume in 1H23 also led to a dilution of the firm’s costs and expenses. We estimate that gross profit per tonne of the firm’s clinker was Rmb30 in 1H23, down Rmb54 YoY.

Expense ratio increased, weighing on net margin. In 1H23, the firm’s selling, G&A, and financial expense ratios rose 0.2ppt, 1.7ppt, and 0.1ppt YoY to 1.7%, 13.0%, and 2.1%. The slight rise in expense ratios weighed on its earnings.

Aggregate business steadily expanding; hazardous and solid waste treatment business under pressure. In 1H23, the firm's aggregate sales volume increased 15.4% YoY to 15.95mnt, and its GM fell 7.3ppt YoY to 48%. That said, GM of the aggregate business remained relatively high. In 1H23, revenue from the hazardous and solid waste treatment business dropped 24% YoY to Rmb476mn, and GM fell 3.3ppt YoY to 29.3%.

Net operating cash flow remained high. The firm’s net operating cash flow rose 21.5% YoY to Rmb989mn in 1H23, due to sound payment collection.

Trends to watch

Maintains leading position in northern China; to benefit from industry recovery. The firm's earnings per tonne came under pressure in 1H23 due to a slow demand recovery and fierce price competition. However, we believe the firm's presence and market share in northern China remain solid. As the real estate sector bottoms out and infrastructure construction accelerates, the firm’s main markets will likely recover. We expect to see improvement in the firm’s sales volume, selling prices, and earnings.

Financials and valuation

Due to weak demand and sharper-than-expected decline in per-tonne earnings, we cut our 2023 and 2024 attributable net profit forecasts 59% and 19% to Rmb514mn and Rmb1.22bn. The stock is trading at 40x 2023e and 17x 2024e P/E. We maintain an OUTPERFORM rating. Given the recovery of the industry and our assumption that the firm's earnings per tonne will recover, we maintain our target price of Rmb9.9, implying 22x 2024E P/E, implying 27% upside.

Risks

Disappointing demand recovery; intensifying competition.