SHANGFENG CEMENT(000672)：CEMENT BUSINESS TO BOTTOM OUT;OTHER SUPPORTING BUSINESSES EXPANDING STEADILY

　　2022 and 1Q23 results in line
　　Shangfeng Cement announced its 2022 and 1Q23 results: In 2022, revenue declined 14.2% YoY to Rmb7.14bn, and attributable net profit fell 56.4% YoY to Rmb949mn. In 4Q22, revenue slid 24.8% YoY to Rmb1.97bn, and attributable net profit decreased 82.5% YoY to Rmb103mn. The firm’s 2022 results are in line with market consensus. In 1Q23, revenue dropped 6.8% YoY to Rmb1.39bn, and attributable net profit fell 49.4% YoY to Rmb173mn, in line with our expectations.
　　1） Decline in sales volume lower than industry average. In 2022, sales volume of Shangfeng Cement’s cement clinker fell 7% YoY to 19.33mnt, with cement sales volume down 3% YoY to 14.87mnt, a narrower decline than the industry average. 2） Per-tonne ASP and per-tonne gross profit under pressure. ASP of the firm's cement clinker per tonne （tax excluded） dropped by Rmb38 YoY （or 11% YoY） to Rmb308 in 2022. Coupled with YoY coal cost hikes, this has led to a YoY decrease of Rmb53 （or 38%） in the per-tonne gross profit of the firm’s cement clinker business, which reached Rmb89 in 2022. 3） Expense ratios increased. The firm's 2022 selling and G&A expense ratios rose 0.4ppt and 1.7ppt YoY to 1.9% and 8.2%. 4） Aggregate business expanding steadily; GM remained high. In 2022, the firm's aggregate sales volume rose 21% YoY to 16.12mnt, maintaining steady growth despite the industry downturn. GM of the aggregate business remained high at 78.7%.
　　Cement demand remained weak over January-February and started to pick up since March, driving up sales volume and prices. As such, we believe Shangfeng Cement’s gross profit per tonne of the cement clinker business recovered QoQ in 1Q23. In 1Q23, the firm's blended GM fell 14.8ppt YoY to 26.3% （mainly due to high base for price in 2022）， but improved 1.8ppt QoQ.
　　Trends to watch
　　Demand recovery and output and sales volume ramp-up promising; upbeat on full-year earnings. We believe demand in Shangfeng Cement’s core markets has been seeing a mild recovery since March, driving a rebound in the firm’s prices and per-tonne earnings. In addition, the firm’s production line in Du’an （Guangxi province） came on-stream at end-2022, and its production line in Dujun （Guizhou province） is scheduled to start operation in 2Q23. We expect the firm to benefit from recovering demand and incremental output and sales volume in 2023, and its earnings to recover quarter by quarter.
　　Other supporting businesses expanding steadily. Shangfeng Cement’s other supporting businesses （e.g., aggregate and environmental protection） maintained steady growth. Sales volume of the firm’s aggregate rose despite headwinds in 2022, contributing 24% of its total gross profit （up 9ppt YoY）。 Revenue from the environmental protection business grew nearly 60% YoY to Rmb208mn. Nexchip Semiconductor Corporation, in which Shangfeng Cement holds a stake, was approved to launch an IPO on the SSE STAR Market and will soon proceed to issue shares. The latest round of financing of its Guangzhou CanSemi project has boosted the firm’s fair value by Rmb50mn. We believe the firm’s efforts to expand its supporting businesses are gradually paying off, which may help the firm stabilize earnings and optimize capital allocation.
　　Financials and valuation
　　We lower our 2023e attributable net profit forecast 5.4% to Rmb1.54bn and introduce our 2024e attributable net profit forecast of Rmb1.71bn to reflect our per-tonne earnings revisions. The stock is trading at 7.1x 2023e and 6.4x 2024e P/E. We maintain OUTPERFORM and our TP at Rmb14.0 as the industry is still recovering. Our TP implies 8.8x 2023e and 7.9x 2024e P/E, offering 24% upside.
　　Risks
　　Demand recovery disappoints; sharper-than-expected coal price hikes.
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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。