HUAXIN CEMENT(600801)：1Q23 RESULTS UNDER PRESSURE;SEE INTEGRATED DEVELOPMENT AND INTERNATIONALIZATION

　　1Q23 results miss our expectations
　　Huaxin Cement announced its 1Q23 results: Revenue rose 1.5% YoY to Rmb6.63bn. Net profit attributable to shareholders fell 63.1% YoY to about Rmb248mn. Recurring net profit attributable to shareholders fell 64.0% YoY to about Rmb234mn. The firm's 1Q23 results missed our expectations, due to heavier-than-expected pressure on its earnings per tonne.
　　Demand recovering and revenue resilient. Data from digitalcement.com shows cement shipment rates in central and southwestern China averaged 45% and 44% in 1Q23 (+5ppt YoY and flat YoY), indicating demand recovered. In 1Q23, the ASP of high-grade cement in central and southwestern China declined 15% and 11% YoY. We estimate the firm's cement price per tonne still fell sharply YoY. Considering the firm's quarterly revenue continued to grow YoY, we think production and sales of non-cement products such as aggregates maintained rapid growth, and their revenue contribution increased.
　　Earnings per tonne under pressure; GM falling YoY. We think the firm's earnings per tonne for cement and clinker remained under considerable pressure, given the sharp price decline of major products and the mild drop in thermal coal prices in 1Q23 (prices of 5,500kcal thermal coal in Qinhuangdao port at Rmb1,130/t in 1Q23, down 4% YoY). In 1Q23, the firm's blended GM fell 6.1ppt YoY to 20.2%.
　　Expense ratio rising to some extent. In 1Q23, the firm's selling, G&A, R&D, and financial expense ratios were 5.6%, 6.0%, 0.2%, and 1.0%, up 0.5ppt, 0.6ppt, 0.1, and 0.2ppt YoY). All four expense ratios increased.
　　Net operating cash flow remaining strong; net gearing ratio rising QoQ. In 1Q23, the firm's net operating cash flow improved substantially YoY to about Rmb330mn. Its net gearing ratio at end-1Q23 rose 3.75ppt QoQ to 37.6%, but remained solid.
　　Trends to watch
　　Mild recovery in sector fundamentals to support improvement in volume and price. Data from digitalcement.com shows cement shipment rate in central China was 67% as of April 21, up 4.5ppt WoW implying that demand continues to recover steadily. In 2023, we expect cement demand to rise steadily amid a narrowing decline in demand from the real estate sector and accelerating growth of physical workload for infrastructure projects. This should bolster a recovery in the cement industry and boost the firm's sales volume, prices, and earnings, in our view.
　　Internationalization and integrated development to boost medium-to-long-term growth. In 2022, revenue from overseas factories rose 62.3% YoY to Rmb4.19bn, and EBITDA (based on actual forex) rose 40% YoY to over Rmb1.4bn, implying sound operating efficiency. We expect the firm's overseas business to maintain solid revenue and profit growth in 1Q23. The firm announced on April 5 that it had completed the acquisition of the Oman project in the Middle East, and we believe the firm’s overseas business will continue to contribute considerable profit.
　　For domestic business, the firm's annual production capacity of aggregate reached about 210mnt/yr at end-2022. We expect the aggregate business to maintain rapid growth of production and sales, and its revenue and profit contribution may increase further. We are upbeat on the firm's profit growth, cost reduction, and efficiency enhancement driven by its overseas expansion and integrated value chain development, and remain upbeat on its medium-to-long-term growth.
　　Financials and valuation
　　We maintain our 2023 and 2024E attributable net profit forecast at Rmb4.0bn and Rmb4.6bn. The stock is trading at 7.7x 2023 and 6.7x 2024E P/E. We maintain OUTPERFORM rating and target price of Rmb21.2, implying 11.1x 2023 and 9.7x 2024E P/E, implying 44% upside.
　　Risks
　　Demand recovery and/or integrated expansion disappoint.
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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。