2023 results miss our forecast

Shangfeng Cement announced its 2023 results: Revenue fell 10.3% YoY to Rmb6.40bn and net profit attributable to shareholders fell 21.6% YoY to Rmb744mn. In 4Q23, revenue fell 22.9% YoY to Rmb1.52bn and net profit attributable to shareholders fell 57.4% YoY to Rmb43.75mn. The firm’s 2023 results missed our expectations, mainly due to a decline in per-tonne earnings and higher-than-expected impairment and fair value change losses in 4Q23.

Sales volume rebounded YoY thanks to on-stream operation of new production lines. In 2023, the firm’s cement and clinker sales volume rose 11% YoY to about 21.45mnt, which we attribute to the incremental contribution from the on-stream operation of its production line in Duyun, Guizhou.

Average price and gross profit per tonne under pressure. Due to fierce price competition in the industry, the average price per tonne of cement and clinker dropped Rmb59 or 19% YoY to Rmb249 in 2023, and the gross profit per tonne fell Rmb28 YoY to Rmb60.

Efficiency improving in northwest China but under pressure in east China. Due to falling demand and fiercer price competition, the firm’s revenue from east China fell 19.3% YoY to Rmb4.39bn in 2023, and its gross margin declined 8.93ppt YoY to 26.8%. However, it maintained sound operating efficiency in northwest China, with revenue up 5.0% YoY to Rmb1.28bn and gross margin up 11.45ppt YoY to 44.6%.

Expense ratio increased. In 2023, the firm’s selling, G&A, R&D, and financial expense ratios stood at 2.2%, 10.3%, 2.3%, and 0.3%, up 0.3ppt, up 2.1ppt, down 0.5ppt, and largely flat YoY.

Impairment and fair value changes weighed on profit. The firm’s provisions for asset impairment losses and credit impairment losses totaled Rmb67.01mn in 2023, and its losses from fair value changes totaled about Rmb42.98mn in 4Q23, both rising sharply YoY and weighing on the profit in 4Q23.

Cash flow remained solid; dividend payout ratio rose sharply. In 2023, the firm’s net operating cash flow rose 9.53% YoY to Rmb1.12bn, implying solid cash flow despite weaker earnings. According to the firm’s 2023 profit distribution plan, its dividend payout ratio rose sharply to 51.4%, up about 16ppt YoY.

Trends to watch

Business climate in core markets to stabilize and recover. We believe the firm still sees solid demand from east China. As the industry continues to record meager earnings or even losses, companies increasingly seek to raise product prices. If the industry withstands the pressure during the slack season, we expect the firm to raise product prices and improve its earnings in core markets in 2H24 as funds becomes available and demand increases.

Financials and valuation

As we lower our assumptions for earnings per tonne, we cut our 2024/2025 attributable net profit 18.7%/15.0% to Rmb740mn/Rmb840mn. The stock is trading at 9.4x 2024e and 8.2x 2025e P/E. We maintain OUTPERFORM and cut our target price 17.7% to Rmb9.3, implying 12.2x 2024e and 10.7x 2025e P/E, offering 30.3% upside.

Risks

Weaker-than-expected demand; fiercer price competition.