Guotai Junan maintains "buy" rating on CNBM (03323) with target price lowered to HK$3.23.

Guotai Junan released a research report stating that they maintain a "buy" rating for CNBM (03323). Considering the significant losses in the cement sector for CKH HOLDINGS and the profit pressures still present in the materials sector, they have lowered their net profit forecast for 2024 to 11.75 billion, 22.76 billion, and 29.87 billion yuan (a decrease of 28.03 billion, 23.76 billion, and 20.55 billion yuan), and have also lowered the target price to HK$3.23. The company achieved revenue of 83.471 billion yuan in the first half of 2024, a year-on-year decrease of 18.5%, with a net loss of 2.018 billion yuan, turning from a profit the previous year and falling below expectations. In the first half of the year, the cement business in the basic building materials sector continued to suffer losses, but the losses narrowed in the second quarter. The new materials sector, including fiberglass, blades, and membranes, still maintained the ability to generate profits. Key points from Guotai Junan: -The loss in the cement sector slightly narrowed in the second quarter, and there is an increase in willingness in the industry to raise prices "off-peak" in the third quarter. -In the first half of 2024, the company achieved sales of 1.14 billion tons of cement and clinker, a year-on-year decrease of 19.9%, higher than the industry's 10% decrease in sales. The company had to sacrifice some sales volume to maintain supply-demand balance within various regions under the impact of a steep decline in industry demand. The price per ton of cement and clinker for the company was 241 yuan, a year-on-year decrease of 19.1%. Despite repeated price increases for clinker along the Yangtze River in April and May, the overall price increase effect was not significant. However, with a slight decrease in coal prices on the cost side, it is expected that the company's loss per ton of cement will narrow in the second quarter. As the industry still faces profit pressures in the third quarter, there is an increased willingness to raise prices "off-peak" in various regions of the country, resulting in an expected comprehensive price and profit recovery for the company in the third quarter. -The new materials sector saw an increase in volume but a decrease in profit. Engineering services going overseas and maintenance services are highlights. 1) New materials sector: In the first half of 2024, the revenue of the new materials sector was 23.55 billion yuan, a year-on-year increase of 0.6%, with a gross profit margin of 23.7%, a year-on-year decrease of 2.30 percentage points. Sales volumes for gypsum board, fiberglass, carbon fiber, blades, and membranes increased by 6.9%, 19.4%, 10.9%, -21.6%, and 15.1% respectively compared to the previous year, with prices decreasing by -2.1%-18.4%, -38.2%, -15.7%, -34.5%. The company's leading position in the field of new materials is reflected in the good performance of various sectors, but under increasing competition, there is pressure to lower prices, leading to a decrease in profit compared to last year. 2) Engineering services sector: Achieved revenue of 20.57 billion yuan in the first half of 2024, a year-on-year increase of 1.7%, with a gross profit margin of 18.6%, a year-on-year increase of 1.0 percentage points. In the background of increased pressure on downstream cement industry contracts in China, overseas and maintenance services are still positive, with overseas contracts in the first half of 2024 increasing by 9% year-on-year and maintenance service contracts increasing by 41% year-on-year. - Capital expenditures have moderately decreased, and financial risks are under control. In the first half of 2024, the company's capital expenditures were 13 billion yuan, a year-on-year increase of 8%. The total amount of capital expenditures has decreased moderately, with a shift towards new materials, overseas investments, and equity investments. With accounts receivable of 86.6 billion yuan, lower by 3.4 billion compared to the previous year, the company has a 60% asset-liability ratio, indicating controllable financial risks. Risk warning: Inadequate implementation of peak-off pricing, and increases in coal prices.