The Zhitong Finance app learned that Ping An Securities published a research report saying that considering the valuation of the building materials sector has fallen to a historically low level, high-quality companies have allocation value and maintain the industry's “better than the market” rating. Looking ahead to 2024, land acquisition and commencement shrinks supply, income and housing price expectations limit demand, compounding the diversion of the second-hand housing market, judging that there is still downward pressure on real estate sales and construction, and the completion side is not optimistic. On the other hand, urban village renovation, as one of the “three major projects,” has the characteristics of high political positioning and continuous policy catalysis. It favors the release of demand for building materials such as paint, waterproofing, and pipes. The degree of benefit depends on the scale of the transformation and the transformation model.

Ping An Securities's views are as follows

Market demand: Downstream real estate may still be under pressure, focusing on urban village renovation.

As the backlog of demand was completely released and economic and revenue concerns worsened, real estate sales declined and then rose in 2023, and land acquisition and commencement of construction continued to be under pressure. Only the completion end benefited from the promotion of the “guaranteed housing” policy and performed better. Looking ahead to 2024, land acquisition and commencement shrinks supply, income and housing price expectations limit demand, compounding the diversion of the second-hand housing market, judging that there is still downward pressure on real estate sales and construction, and the completion side is not optimistic. On the other hand, urban village renovation, as one of the “three major projects,” has the characteristics of high political positioning and continuous policy catalysis. It favors the release of demand for building materials such as paint, waterproofing, and pipes. The degree of benefit depends on the scale and model of transformation. Considering the long renovation cycle and large capital requirements of urban villages, follow-up attention will be paid to policy funding support and pilot progress in Guangzhou, etc., to drive demand for building materials in 2024 or in an orderly manner.

Consumer building materials: Preferably select strong alpha companies and focus on game value at the beginning of construction.

In the context of a weak recovery in demand in 2023, price competition for waterproof/paint/sanitary ware is fierce. Among them, high-quality enterprises achieved revenue growth by adjusting channels and expanding categories, while reducing costs and increasing efficiency in terms of operations, compounded by falling raw materials to help improve profits, demonstrating strong alpha capabilities. However, it is undeniably dragged down by the downturn in real estate. Revenue growth in a single quarter slowed, and performance recovery fell short of expectations at the beginning of the year; at the same time, the declining dividends on raw materials are difficult to sustain, so the investment logic still focuses on whether beta can stabilize. Looking ahead to 2024, considering that the commencement of real estate sales is still under pressure and that the “three major projects” bring about building materials demand or lag, it is recommended to select individual stocks with their own industrial logic and strong alpha capabilities, such as Dongfang Yuhong, which has equity incentives showing confidence in development, Beixin New Materials, which integrates two wings to accelerate the layout, has a steady gypsum board business, continues to advance in a concentric circle, and has a steady retail business.

Cyclic building materials: cement profits have fallen to a low level, and the supply and demand pattern of float glass is weakening.

In terms of cement, in 2023, misspikes in various regions continued to increase, but due to weak real estate commencement and weak support for infrastructure growth, cement prices and profits declined sharply in the second and third quarters. Looking ahead to 2024, considering that real estate construction is still under pressure, infrastructure investment, or single-digit growth, it is judged that overall cement demand has declined steadily and slightly. In terms of profit, cement profit has fallen to an all-time low. It is estimated that Conch Cement's gross profit of 2023Q3 tons (60 yuan/ton) is only higher than in the whole of 2015, and there is limited room for subsequent decline. In 2023, the Ministry of Industry and Information Technology and others issued a paper to study the inclusion of cement in the carbon market, which will help accelerate the removal of production capacity in the industry and follow up on the progress of carbon trading. In terms of float glass, improvements completed in 2023 combined with a decline in soda ash prices, glass manufacturers' profits improved markedly in the second and third quarters. Looking ahead to 2024, there is still room for soda ash prices to decline, but there is great uncertainty on the demand side of glass, and the supply side is more profitable and under long-term pessimistic expectations, it is not too difficult for manufacturers to spontaneously adjust production capacity, so the supply and demand pattern has improved or is not as good as in 2023.

Looking at the main investment line, on the one hand, it focuses on the investment opportunities brought about by the transformation of urban villages, and on the other hand, it focuses on the undervaluation allocation value of high-quality building materials companies.

Among them, the profits of the cement industry are being investigated in stages, focusing on Conch Cement (600585.SH), Huaxin Cement (600801.SH), etc., which have undervaluation and high dividend advantages; consumer building materials select individual stocks with their own industrial logic and strong alpha capabilities, such as Dongfang Yuhong (002271.SZ), Beijian Materials (000786.SZ), Weixing New Materials (002372.SZ), etc. In particular, start-end companies are relatively more valuable; glass companies are expected to have more market value; although supply and demand expectations are weak, the decline in costs is expected to drive further profit improvements. It is recommended to follow Kibin Group (601636.SH).

Risk warning: 1) Downstream real estate and infrastructure performance falls short of expectations; 2) construction materials production capacity contraction or industry pattern clearance falls short of expectations; 3) intense competition for channel resources has led to slow expansion progress.