Anhui Conch Cement Earnings: Recovery Slower than Expected; Shares Still Attractive

Anhui Conch Cement’s 600585 third-quarter net profit of CNY 2.2 billion fell 15% year on year and trailed our expectations. The disappointing performance was due to weak cement prices. The operating environment remains challenging this quarter, with the industry generally delivering sharply lower earnings. After considering the lackluster cement demand and lower margins, we cut 2023-25 earnings by 15%-16%. Consequently, our fair value estimate is lowered to HKD 33.00 per H share (CNY 31.00 per A share) from HKD 37.50 (CNY 34.50). While we still expect a recovery for the sector, we think it will be slow and subdued, given China’s sluggish property market. That said, our view is that Conch is undervalued currently, with H-shares trading at 0.5 times 2024 price/book.

Cement prices have started to recover recently, partly reflecting higher coal prices. We think infrastructure-related construction activities will continue to support cement demand in the near term, following the government’s plan to issue CNY 1 trillion in bonds to help rebuild areas hit by floods and improve urban infrastructure. Nonetheless, the recovery of the industry still hinges on the real estate sector, but we only expect a slow improvement in the longer term. We think supportive policies that lead to more stable home prices will help to restore homebuying confidence and feed a mild recovery through 2025.

While Conch’s cumulative nine months revenue of CNY 99.0 billion was up 16% year on year, net profit disappointed and fell 30% to CNY 8.7 billion. Conch’s gross margin fell to 18.3% from 25.4% a year ago. We remain conservative about the overall margin improvements, and we only expect the gross margin to improve gradually from 2024 onward. On a positive note, despite the weaker earnings, operating cash flow remains steady and was up 1% year on year to CNY 9.7 billion. We believe this will help the firm to navigate through the current tough operating environment.