The Zhitong Finance App learned that Huatai Securities released a research report saying that in 2023, China's cement production was -0.7% of the same caliber (-4.5% of the full caliber ratio), the capacity utilization rate was 59% (2022:66%), and the total profit of the entire industry was -53%. The bank expects the overall supply and demand relationship in the cement industry to remain under pressure in 2024, and the profitability of the domestic market may still be bottoming out. Enhancing the competitiveness of the main business and speeding up the cultivation of new growth poles may still be a priority. Due to a lower price starting point before the Spring Festival and slower price recovery after the holiday season than in previous years, the bank expects most cement companies' profits to decline the same or month-on-month in 1Q24, and the industry's losses may expand.

Huatai Securities's views are as follows:

The domestic market is under pressure in 2023, and differentiation is reflected

In 2023, China's cement production was -0.7% YoY (full caliber -4.5% YoY), capacity utilization rate 59% (2022:66%), and total profit of the entire industry was -53% YoY. Judging from cement companies that have disclosed their annual reports, most companies are constrained by the challenges of the domestic market, and profits have declined somewhat, but individual companies have achieved contrarian growth due to the integration and internationalization of upstream and downstream industrial chains that started earlier. The bank expects the overall supply and demand relationship in the cement industry to remain under pressure in 2024, and the profitability of the domestic market may still be bottoming out. Enhancing the competitiveness of the main business and speeding up the cultivation of new growth poles may still be a priority. Due to a lower price starting point before the Spring Festival and slower price recovery after the holiday season than in previous years, the bank expects most cement companies' profits to decline the same or month-on-month in 1Q24, and the industry's losses may expand.

Reduce costs and improve quality, reduce capital expenses, and focus on cash flow

In 2023, cement companies all reaped in cost reduction. The unit cost reduction ranged from 18 yuan to 50 yuan/ton, but if we calculate that each ton of cement consumes 100 kg of physical coal, the average price of coal falling back in 2023 can contribute about 26 yuan/ton in terms of cost reduction. About half of the sample companies achieved additional cost reduction results in addition to falling coal prices. Despite declining profitability, the operating cash flow of most of the sample companies improved year over year in 2023, which shows that by strengthening the control of working capital, most companies were able to offset the impact of declining profits. The capital expenditure of the sample companies generally contracted in 2023 (-53% to -7% year over year), reflecting that the industry is generally more cautious about demand prospects (year-on-year change in capital expenditure of -23% to +49% in 2022). After deducting losses and not paying dividends, the weighted average dividend payout rates of the sample companies in 2022/2023 were 49%/47%, respectively.

The extension and internationalization of the industrial chain may gradually become the focus of development

As demand in the domestic cement market is facing challenges, establishing new growth poles may be even more important in the future. The extension and internationalization of the industrial chain are expected to gradually become the new focus of industry development. The sample cement companies that have disclosed their annual reports accounted for 14% of non-cement business revenue in 2023 (2022:12%), and overseas revenue accounted for 8% (2022:5.4%). The overall share increased, but there was significant differentiation among companies. The expansion of the aggregate business is a common driving force. The sample company's aggregate revenue in 2023 accounted for 35% (2022:26%) of the non-cement business. However, it is worth noting that the average price of aggregates nationwide in 2023 is -5 yuan/ton compared to 2022, and the supporting effect of speeding up the development of the aggregate business is also weakening marginally.

An overall still-healthy balance sheet may be a double-edged sword

Thanks to 1) the overall improvement in operating cash flow brought about by the control of working capital, and 2) general cuts in capital expenditure, the net debt ratio (net debt/owners' equity) of the sample companies at the end of 2023 increased only slightly by 0.3 pct to 26% year on year. The balance sheet was relatively healthy, and a few companies were still in a net cash position. The bank believes that a healthy balance sheet helps companies get through the cycle more calmly, but when some regions focus on share competition at certain stages, a healthy balance sheet may also become an accelerator for the phased decline in cement prices.

1Q24 outlook: demand starts slower after the holiday season than in previous years, and the industry's losses or phased expansion

Since the Spring Festival, the recovery in cement demand has generally been slower than in previous years. As of the 7th week after the Spring Festival, the national average cement shipment rate was 47.6%, 15.6pct lower than the same period in the 2023 lunar calendar. Affected by this, the price performance after the holiday was weaker than the same period in the 2023 lunar calendar. The average price of cement in the 7th week was 2 yuan/ton compared to the Spring Festival (2023: +16 yuan/ton). The average price of cement in 1Q24 was 10/65 yuan/ton year-on-year and month-on-month, respectively. With volume and price generally weakening, the bank expects the 1Q24 cement industry's profit level to bottom further on a month-on-month basis. Excluding potential non-operating factors, most cement companies may face phased losses.

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