According to its earnings warning, the company’s earnings plummeted about 81% QoQ in 3Q23. It is disappointing as the strong recovery in 2Q23 failed to last. Weak prices of cement, commercial concrete and glass fibre were the culprits. Despite this, we still expect a much stronger 4Q23 with Chinese Government expected to drive economic growth by further boosting infrastructure investments. We cut our 2023-25 earnings forecasts by 14-25%. We reiterate our BUY call with target price reduced to HK$4.86.
　　Key Factors for Rating
　　CNBM guides for a roughly 70% YoY fall in earnings in 9M23 under CAS. This implies its earnings was about RMB428m in 3Q23, down 81% QoQ and 65% YoY. The decline in the ASPs of cement, concrete and glass fibres and lower sales volume of cement and concrete were key drivers for the sharp fall in earnings. In particular, China’s cement output dropped 7% YoY in July and August 2023 whereas the average cement price down 8% QoQ in 3Q23.
　　Looking ahead, we expect a much stronger 4Q23. Chinese Government has basically completed the issue of this year’s local government special bonds by the end of September and construction of projects funded by these bonds will start in 4Q23. This will translate into demand for cement. Domestic cement prices have also bottomed out in mid-September. In addition, 4Q is traditionally a peak season for cement demand in China given the less humid climate.
　　We cut our 2023-25 earnings forecasts by 14-25% in view of the lower-than- expected 3Q23 earnings. We originally assume the strong performance in 2Q23 to last but it fails to live up to our expectation. In our new forecasts, we factor in our recently increased coal price forecasts. We also assume the glass fibre price to remain low till the end of the year.
　　Key Risks for Rating
　　Lower-than-expected cement prices.
　　Higher-than-expected coal prices.
　　Valuation
　　We reduce our target price from HK$5.46 to HK$4.86 mainly to reflect the cuts in our earnings forecast. We still set our target price at the average of 0.6x 2023E P/E and 0.5x 2023E P/B. This is equal 9.3x 2023E P/E.