The net profit of CR Bldg Materials Tech plummeted 60% YoY to RMB644m in 2023, close to the high-end of its earnings warning (down 58-67% YoY). The sharp fall in earnings was due to the decline in both unit gross profit and sales volume for its cement business. For 2024, we now expect to see flat earnings as the strong growth in aggregate business should be offset by further earnings decline at its cement business. We cut our 2024/25 earnings forecasts by 38%/32%. We reiterate our HOLD call and lower our target price to HK$1.51.
　　Key Factors for Rating
　　In 2023, the company’s sales volume of cement, clinker and concrete dropped 7% YoY, 12% YoY and 14% YoY respectively. More importantly, owing to the depressed cement prices, the unit gross profit of cement and clinker fell 33% YoY to RMB32/tonne. In particular, the gross profit further dropped to RMB15/tonne in 4Q23 as the company prioritized market share in that quarter.
　　Looking into 2024, we expect the sales volume of its aggregate business to jump 76% YoY to 80m tonnes as more projects start to contribute. In particular, the 30m tpa project at Fengkai will show full-year contribution after starting production in mid-2023. The increase in sales of higher priced products in Guangdong Province should also result in 13% YoY increase in ASP. On the whole, we expect the gross profit of its aggregate business to surge 82% YoY to RMB1.6bn in 2024.
　　However, the company has continued to prioritise market share for its cement business so far this year. Although we expect its unit gross profit to rise on lower coal prices, it will improve from the very low base in 4Q23. For the full-year, the gross profit of its cement business should further drop 32% YoY to RMB22/tonne in 2024. Hence, we expect the gross profit of its cement business to drop 29% YoY to RMB1.58bn in 2024.
　　Key Risks for Rating
　　Significant recovery of the profitability of the cement / clinker business.
　　Lower-than-expected costs.
　　Valuation
　　We cut our target price from HK$2.02 to HK$1.51. Our target price is the average of 8x 2024E P/E (rolled over from 2023) and 0.32x 2024E P/B (down from 0.41x 2023E). The target P/B is lowered because of the company’s lower ROE (from 1.9% for 2023E to 1.5% for 2024E). Our target price is equal to 14.9x 2024E P/E.