While the company’s net profit dropped 67% YoY in 2024, we estimate its core earnings actually grew 37% YoY. More importantly, the unit gross profit of cement and clinker surged 68% QoQ in 4Q24 on decent seasonal demand and disciplined market output control. We expect its earnings to surge 50% YoY in 2025 on improved unit profit for cement and clinker and volume growth of aggregate. We change our 2025/26 earnings forecasts by +11%/-8% after post results adjustments. We reiterate our BUY call with target price lifted to HK$3.06.
　　Key Factors for Rating
　　The company’s 67% YoY fall in reported net profit (to RMB211m) is at the middle of the company’s guided range (down 62-72% YoY). However, we estimate its core earnings actually grew 37% YoY to RMB714m after stripping off non- recurring items (mainly disposal gain in 2023 and impairments in 2024).
　　More importantly, the gross profit per tonne of cement and clinker surged 68% QoQ to RMB54/tonne in 4Q24. Cement producers in China have been working closely together to limit output amid declining demand starting from 2Q24. The impact was obvious in 4Q24 as it was the peak season of its key market southern China and we had more than normal sunny days in 4Q24.
　　The company’s free cashflow returned to positive in 2024 after being negative for three straight years by adopting more disciplined approach towards its capex (down 33% YoY to RMB3.7bn in 2024). Its net debt to equity slipped from 30% at end-2023 to 29% at end-2024.
　　China’s cement demand should drop further in 2025 given the continued decline in demand from property. In respond to the expected decline in demand, cement producers in Guangdong and Guangxi provinces plan to further cut output by more stringent peak load shifting production. The company targets to reduce the sales volume of cement and clinker by 8% YoY in 2025.
　　Key Risks for Rating
　　Cement producers fail to work together to strictly control output amid declining demand.
　　Further delay in completion of a pier supporting a major aggregate project.
　　Valuation
　　We increase our target price from HK$2.38 to HK$3.06. Our target price is the average of 20.2x 2025E P/E (1 standard deviation above 10-year average, up from 14.5x 2024E previously) and 0.40x 2025E P/B (down from 0.47x 2024E previously). The latter is derived from the P/B vs ROE regression of its peers. Our new target price is equal to 18.5x 2025E P/E.