3Q23 results in line with our expectationsChina Resources Cement announced its 1–3Q23 results: Revenue fell 26.1% YoY to HK$17.89bn, and attributable net profit declined 61.3% YoY to HK$710mn. In 3Q23, revenue fell 29.2% YoY to HK$5.72bn, and attributable net profit rose 171.1% YoY to HK$89.26mn. The firm's 3Q23 results were in line with our expectations.
　　1) Sales volume fell due to weak downstream demand. In 1–3Q23, the firm's cement and clinker sales volume fell 14.5% YoY to around 47.34mnt; it declined 21.4% YoY to 17.79mnt in 3Q23, with the decline widening from 2Q23 (-12.2% YoY). 2) Industry price competition is fierce, and a significant decline in ASP weighs on earnings per tonne. In 1–3Q23, the ASP of the firm's cement and clinker fell HK$41 YoY or 11.2% to HK$322, and the ASP in 3Q23 was HK$268, down HK$35 YoY or 11.5%. We estimate that the firm's gross profit per tonne of cement and clinker was HK$45 in 1–3Q23 (-HK$15 YoY) and HK$22 in 3Q23 (+HK$6 YoY or -HK$49 QoQ).
　　3) Expenses per tonne increased YoY. We estimate that the firm's expenses per tonne for cement and clinker rose HK$7 YoY to about HK$40 in 3Q23. 4) Cash balance decreased QoQ, and the borrowing ratio fell slightly. At the end of 3Q23, the firm's cash balance was HK$2.74bn, down HK$603mn from end-1H23. Its borrowing ratio was 39.8% at end-3Q23, 1.4ppt lower than 41.2% at end-1H23. We think the firm's overall financial leverage remains solid.
　　Trends to watch
　　Cement prices in the firm's key market are recovering; 4Q23 earnings to recover marginally. We think the significant decline in cement prices in southern China, the firm’s key market, dragged its 3Q23 earnings.
　　According to Digital Cement, cement prices began to rebound in southern China in mid-October. We expect a mild recovery in the gross profit per tonne of cement in 4Q23, which, coupled with rising contribution from aggregate projects, should drive QoQ earnings growth in 4Q23.
　　Rising output and sales volume of aggregate business to contribute incremental profit. In 3Q23, the firm's other income rose HK$83.51mn YoY, which we attribute to the rising output and sales volume of aggregates. According to the firm's 1H23 report, its annual aggregate　　production capacity was 83.4mnt/yr as of end-1H23, and with aggregate projects to be built and under construction, the potential annual production capacity totals about 146mnt/yr. As the output and sales volume of the firm's aggregate business ramp up, contributing to the integrated operation of cement, aggregate, and ready mixed concrete along the value chain, we expect the aggregate business to generate significant incremental profit.
　　Financials and valuation
　　As we lower our earnings per tonne assumption, we cut our 2023 and 2024 attributable net profit forecasts by 37.8% and 42.0% to HK$962mn and HK$1.20bn. The stock is trading at 13.9x 2023e and 11.1x 2024e P/E. We maintain OUTPERFORM rating and cut our target price 33.3% to HK$2.67 (19.4x 2023e and 15.5x 2024e P/E), implying 40% upside.
　　Risks
　　Disappointing demand recovery and/or aggregate earnings growth.