HUAXIN CEMENT(600801)：2Q23 RESULTS BEAT;UPBEAT ON OVERSEAS BUSINESS AND INTEGRATED DEVELOPMENT

　　1H23 attributable net profit fell about 25% YoY
　　Huaxin Cement announced its 1H23 results: Revenue rose 10% YoY to Rmb15.83bn, but attributable net profit fell 25% YoY to Rmb1.19bn. In 2Q23, revenue rose 17% YoY to Rmb9.20bn and attributable net profit grew 3% YoY to Rmb945mn. The firm’s 1H23 results beat our forecasts and market expectations, mainly due to higher-than-expected overseas earnings contribution and faster-than-expected development of its integrated business.
　　Trends to watch Sales volume slightly beat expectations thanks to increased sales in
　　overseas market. According to Digital Cement, the average cement shipment rates fell 1ppt YoY to 51% in central China, declined 5ppt YoY to 50% in southeast China, and rose 2ppt YoY to 60% in eastern China in 1H23. We believe that market demand in the firm’s major domestic sales regions faced downward pressure. In 1H23, the firm’s cement and clinker sales volume rose 2% YoY to 29.95mnt, with domestic sales volume down about 1% YoY. Its integrated business developed rapidly. In 1H23, aggregate sales volume grew 103% YoY to 50.51mnt and concrete sales volume rose 82% YoY to 10.95mn cbm.
　　Overseas expansion well on track; integrated development paying
　　off. We believe the firm is steadily expanding its overseas business. It announced on April 5 that it had consolidated the Oman project in the Middle East into its financial statement. The acquisition of new cement businesses in South Africa and Mozambique is progressing. We see a large upside for the growth and efficiency improvement of the firm’s overseas business. 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. We expect earnings contribution from the overseas business to keep increasing amid the firm’s efforts to tap potential demand and new earnings growth drivers in the overseas market.
　　In addition, the firm’s earnings are more resilient than that of peers thanks to the accelerated integration of its aggregate and ready-mix concrete businesses. Sales volume of its aggregates and commercial concrete surged. We think the profit contribution from the two products increased.
　　This, coupled with the expansion of overseas business, led to a positive attributable net profit growth in 2Q23.
　　Sector to bottom out; we foresee recovery in earnings and valuation.
　　Due to supply-demand imbalance, cement prices have fallen sharply in most regions of China, approaching or even falling below the costs of some cement producers. We believe the cement industry is facing heavy pressure from operating losses. We see limited room for further price declines. Some regions are working on new peak-shifting production plans. We think the cement industry may have shown signs of bottoming out. We expect a marginal recovery in demand as the peak season comes in September and October and downstream companies see available funds, boosting price and earnings recovery in the firm’s core sales regions. We estimate the A-share 2023e dividend yield at more than 4%, implying a margin of safety and substantial room for valuation recovery.
　　Financials and valuation
　　As cement sales volume and prices have been under greater-than- expected downward pressure since 2Q23, we lower our 2023 and 2024 attributable net profit forecasts 24.5% and 21.4% to Rmb3.02bn and Rmb3.61bn. The stock is trading at 9.6x 2023e and 8.1x 2024e P/E. We maintain an OUTPERFORM rating and our target price at Rmb21.2 （14.7x 2023e and 12.3x 2024e P/E with 53% upside）， as we think: 1） The sector is likely to recover from the bottom; 2） the firm’s overseas business expansion and integrated development are well underway, which will likely boost future growth potential; and 3） the valuation is still at a historical low.
　　Risks
　　Intensifying competition; disappointing development of overseas business and/or integrated business development.
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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。