The Zhitong Finance App learned that Dongwu Securities released a 24-year strategy report for the cement and glass industry. In terms of cement, macro-countercyclical adjustments will be strengthened in 2024. The three major projects are expected to support real estate demand and cement demand is expected to stabilize. The industry inventory center is expected to move downward from 2023, reflected in improved price elasticity during the peak season. The price center may rise steadily throughout the year, and regional elasticity with high market concentration and high capacity utilization during peak season may be more prominent. In terms of glass, profits in the short to medium term are resilient, and supply-side clearance is still needed in the medium to long term. In addition, leaders are speeding up the layout of second curves such as photovoltaic glass at a high level of industry sentiment, or gradually ushered in a period of performance release.

The views of Soochow Securities are as follows:

Cement: At the bottom of the boom, the supply side is expected to be optimized, and industry sentiment and valuation are expected to recover.

1) The industry boom fell to the bottom of history in 2023, and the decline in demand brought a new test to market balance. The country's cement production fell from a high-ranking platform of 23-2.4 billion tons to 2-2.1 billion tons, and the industry sentiment fell to the bottom of history. The Cement Association expects total industry profit in 2023 to be the lowest value since 2011. However, due to the restoration of corporate balance sheets due to historically high profits and the characteristics of cement's own production capacity, it is difficult to quickly clear existing production capacity. The balance of the market is being thoroughly tested, and the traditional false peak effect is weakening.

2) The bank expects the traditional off-season peak to remain or strengthen in 2024, and active supply control in the industry is expected to be stronger. In particular, after experiencing a sharp decline in industry efficiency, the willingness of non-heating season enterprises to regulate supply to match demand and actively stabilize prices increased markedly, and the market order in some regions was also rebalanced after competition broke out.

3) Macro countercyclical adjustments will be strengthened in 2024. The three major projects are expected to support real estate demand, and cement demand is expected to stabilize. Under a neutral situation, the bank expects cement demand to remain flat year on year in 2024. First, the decline in real estate investment and new construction starts is expected to narrow significantly; second, the promotion of localized debt and the introduction of new PPP regulations are expected to stabilize traditional municipal utility investment; third, strong financial instruments and the implementation of the three major projects are expected to contribute to the increase in demand.

4) The inventory center of the industry is expected to decline in 2024 compared to 2023, as reflected in improved price elasticity during the peak season, the price center may rise steadily throughout the year, and regional elasticity with high market concentration and high capacity utilization during the peak season may be more significant (such as the Yangtze River Delta).

5) Leading companies have stable cost advantages and increased extrinsic contributions, which are expected to usher in valuation repairs. Compared with the bottom of the industry boom in 2015, profits of Conch and Huaxin increased significantly, reflecting the maintenance of cost advantages of leading companies and the demonstration of extended results.

Glass: Earnings in the short to medium term are resilient. Supply-side clearance is still needed in the medium to long term. The second curve of leading companies is expected to hedge against the downward pressure on the float boom.

1) 2023: Significant profit recovery pushes supply back to expansion, and social inventories are fully eliminated. Manufacturers' inventories were significantly reduced from the high point after the Spring Festival and were in a lower central position during the same period in history. Inventory recovery by downstream traders and processing plants was weaker than seasonal in the second half of the year, and the inventory levels of traders in the Shahe region were lower than in the same period.

2) Supply outlook: Short-term operating rates are expected to be maintained, and industry supply is resilient.

3) Demand outlook: High backlog of construction in the early stages continued to be supported, but downward pressure increased. China's new real estate construction volume in 2019-2021 is high, and the overall delivery cycle has been lengthened since 2021, and the backlog of demand is large. However, starting in 2022, new real estate construction has dropped significantly, affecting the sustainability of demand. Continued progress in building security is expected to release installation demand for unfinished projects.

4) Short-term profits are resilient, and supply-side clearance is still required in the medium to long term. With the arrival of the seasonal peak season in the first half of 2024, the process of transferring manufacturer inventory to middle and downstream traders and processing plants is expected to drive glass prices to rebound, and corporate profits are expected to recover. The sustainability of profits in the medium term requires observing the landing of the Baojiao Building and the restoration of downstream real estate sentiment. If the kiln operating rate is maintained in 2024, the annual effective production capacity is expected to be +4.7% year-on-year. Manufacturers' inventories may accumulate throughout the year, and the industry is under downward pressure.

5) Leading companies stem from silica sand resources and the cost advantages of large-scale procurement, which are difficult to replicate, and will continue to enjoy excess profits. The second curve is expected to gradually enter a period of performance release.

Investment advice:

1) Cement: The net market ratio valuation of the sector is at the bottom of history, and the comprehensive competitive advantage of leading companies is prominent. If macroeconomic regulation is further strengthened to boost medium-term demand expectations, the economy is expected to rebound to the bottom, and the valuation will recover. Recommended leading companies with highlights in the medium- to long-term industrial chain extension: Huaxin Cement (600801.SH), Conch Cement (600585.SH), Shangfeng Cement (000672.SZ), Tianshan Co., Ltd. (000877.SZ), Jidong Cement (000401.SZ), etc.

2) Glass: The cost advantages of leading companies are difficult to replicate, and they will continue to enjoy excess profits. The second curve is expected to hedge against the downward pressure of the float boom to a certain extent. The implementation of capacity replacement policies is conducive to controlling long-term total supply and optimizing the industry pattern. As supply clears up in the medium to long term, leading glass companies can expect to continue to enjoy excess profits and cash flow due to costs. In 2020-2021, the leaders accelerated the layout of second curves such as photovoltaic glass at a high level of industry prosperity, and gradually ushered in a period of performance release. As the real estate chain stabilizes and new growth points are realized, leading valuations are expected to recover. I recommend Kibing Group. It is recommended to focus on China Glass A (000012.SZ), Jinjing Technology (600586.SH), Xinyi Glass (00868), etc.

Risk warning: the risk that demand for infrastructure and real estate falls short of expectations; the risk that raw fuel prices will rise beyond expectations; the risk that the industry competition trend will worsen beyond expectations.