Anhui Conch Cement Earnings: Disappointing Results but Gradual Recovery Expected; Shares Undervalued

Anhui Conch Cement’s 600585 first-half net profit of CNY 6.8 billion is disappointing, falling 32% year on year. The miss is due to lower average selling prices and weak cement demand. That said, we think Conch still outperformed the industry given that some of its peers delivered a sharper drop in earnings.

After incorporating the latest results in our model, we lower our 2023-25 earnings forecasts by 18%-19% and cut our fair value estimates to HKD 37.50 per H-share (CNY 34.50 per A-share) from HKD 45.00 (CNY 40.00). While we still expect a recovery for the sector, we think it will be gradual, given China’s sluggish economic growth and the slow recovery in the real estate industry. Nonetheless, we believe Conch is undervalued currently, with its H-shares trading at 0.5 times 2023 price/book and a dividend yield of more than 5%. We think risks are largely reflected and this marks an attractive entry point for investors willing to hold through the cycle.

Management expects cement demand in second-half 2023 to be supported by infrastructure spending as government-led projects commence. Meanwhile, although real estate investment will remain low, demand is expected to improve through 2025 at a gradual pace. On a positive note, we have seen cement prices stabilizing recently following the improvement in weather conditions in China.

We expect to see more cement producers cut capacity or exit the market given the tough operating environment. We think this a good opportunity for Conch to further consolidate its leadership position in the market and should allow pricing pressure to lessen.

In first-half 2023, Conch’s gross margin fell to 18.7% from 27.7% a year ago. Although fuel and raw materials costs were falling, this is not sufficient to cover the double-digit drop in average selling price for self-produced cement and clinker products. We remain conservative about the overall margin improvements, and we only expect the gross margin to improve gradually from 2024 onward.