HUAXIN CEMENT(600801)：3Q22 RESULTS IN LINE;INTEGRATED DEVELOPMENT OF AGGREGATE READY-MIX CONCRETE ON TRACK

　　3Q22 results in line with our expectations
　　Huaxin Cement announced that revenue and attributable net profit declined 2.9% and 37.6% YoY in 1-3Q22 to Rmb21.81bn and Rmb2.22bn. In 3Q22, revenue fell 3.7% YoY to Rmb7.42bn and attributable net profit dropped 43.3% YoY to Rmb638mn.
　　Demand decline weighed on sales volume in 3Q22. Data from Digital Cement shows that cement production edged up 1% YoY in 3Q22 in central China and dropped 17% YoY in southwestern China. Total production in the two regions fell 8% YoY in 3Q22. As demand in the two regions remained weak we expect sales volume of Huaxin Cement’s clinker to trend downward in 3Q22.
　　Revenue remained solid; cement ASP remained high. Digital Cement, reports that the average ASP of high-end cement in central and southwestern China dropped 10% and 5% YoY in 3Q22 (QoQ growth also slowed significantly). Given that the firm maintained stable revenue in 3Q22, we expect prices of its products in main regions of China to remain high. We think that overseas expansion drove increases of price and profit per tonne. The sales volume of non-cement products such as aggregate and ready-mix concrete also increased rapidly in 3Q22, bolstering revenue growth.
　　GM trended downward YoY and QoQ. In 3Q22, GM fell 3.1ppt QoQ to around 26.3%. Excluding the impact of freight rates, we estimate that GM declined 6-7ppt YoY.
　　Cash flow remained high despite a decline. Operating cash flow declined 29.6% YoY over 1-3Q22, to around Rmb2.51bn. We attribute this to lower cash collection and rising cash payment for procurement. However, the overall cash flow remained high and exceeded attributable net profit in 3Q22.
　　Trends to watch
　　Sales volume and prices to recover in 4Q22; earnings to improve QoQ. Industry-related data we monitor shows that cement shipments in central and southwestern China have marginally turned around since September. Cement shipment rate in southwestern China in late October has grown more than 10ppt since early September. Selling prices in such regions also recovered QoQ. Thus, we expect a mild recover of sales volume and prices of the firm’s cement in central and southwestern China. We expect its cement and non-cement businesses to both bolster the QoQ improve of the firm’s earnings.
　　Rapid business expansion in aggregate; integrated development of aggregate and ready-mix concrete cuts costs, improves efficiency. Huaxin is expanding its aggregate business to areas that have or are close to high-quality mineral resources and key watercourses to better meet market demand. We expect the production-to-sales ratio and operational efficiency of the aggregate business to remain high after a 100mnt aggregate project in Yangxin and supporting facilities come online. We are optimistic that the firm will maintain efficient production and sales and see high GM in aggregate, driving earnings growth. Huaxin is also focusing on integrated development of aggregate and ready-mix concrete. We expect this to create cost advantages for ready-mix concrete with self-produced cement and aggregate. We expect the integrated develop to facilitate the firm’s cost reduction and efficiency optimization.
　　Financials and valuation
　　We cut our 2022 and 2023 attributable net profit forecasts 13.1% and 8.5% to Rmb3.12bn and Rmb3.70bn to reflect our lower assumptions for the firm’s sale volume and per-tonne gross profit. The stock is trading at 9.1x 2022e and 7.7x 2023e P/E. We maintain OUTPERFORM but cut our TP 19.5% to Rmb18.3 (12.3x 2022e and 10.4x 2023e P/E), offering 35% upside.
　　Risks
　　Demand recovery disappoints; slower-than-expected growth in non-cement business; sharper-than-expected rise in coal prices.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。