According to the research report released by Everbright Securities, cement may have a relative advantage as the total demand for infrastructure and real estate construction declined. In 2023, the new construction area in the real estate industry fell by 58% from the highest point in 2019, while infrastructure investment remained at a historical high. In 2023, cement production will drop by 12% from the high point of 2020. The downward trend in the total demand for infrastructure and real estate construction is a common problem faced by various sectors in the real estate industry's chain. Compared to others, the cement industry is trying to improve the supply-demand relationship and support the price by reducing production. If the price increase can be implemented, cement leading enterprises are expected to become rare varieties in the building materials industry with stable profit trends by improving per-ton profitability to counteract the decline in demand. It is recommended to focus on Conch Cement (600585.SH), Huaxin Cement (600801.SH), and Xinjiang Tianshan Cement (000877.SZ).
The main points of view of Everbright Securities are as follows:
The profitability level of cement enterprises in the first half of 24 stabilized at a low level.
In the first half of 2024, affected by the sluggish real estate and slow allocation of infrastructure funds, cement demand significantly decreased (cement production in May 24 fell by 10% YoY), and the average national price of cement in the first half of 24 decreased by 16% YoY. The expected profit of the cement industry in the first half of the year is about 3.5 billion yuan, a decrease of about 76% YoY. Several companies have released performance forecasts for the first half of 24, with a significant decrease in profit or losses, including Tianshan Cement, Tangshan Jidong Cement, and Fujian Cement, with expected losses of 2.9-3.5 billion yuan, 743 million-87 million yuan, and 10.5 million yuan, respectively.
With a weaker demand season, industry self-discipline and production restrictions help to support cement prices.
July is the off-season, and leading companies have increased industry self-discipline and adjusted production schedules. Cement leading enterprises in the Yangtze River Delta plan to stop production for 10 days in July and August, reducing production by about 30%. As a regional leading enterprise, Conch Cement will also participate in this round of off-season production reduction. On July 5th, the price of cement in the Yangtze River along the river increased by 50 yuan/ton. As leading enterprises fully realize that the overall demand cycle is downward, the short-term profit target's importance is increasing at the corporate strategic level, such as Conch Cement's announcement of "profit is the purpose, share is the foundation." Although the demand is expected to continue to decline, cement prices may be supported under the background of consensus among major companies.
It is necessary to observe the implementation of off-season production reduction during peak season.
In the Yangtze River Delta region, the price of cement clinker rose in April and May's peak seasons. However, due to poor implementation of production adjustment, the planned price increase of 30 yuan/ton in April was actually implemented at 15 yuan/ton, and the planned increase of 50 yuan/ton in May was actually implemented at 20 yuan/ton. In late June, the price of cement in the Yangtze River Delta had basically returned to the pre-increase level. Of course, this round of off-season production restrictions has received stronger unity at the industry level, but it is still necessary to observe the implementation of the later period for caution.
Risk analysis:
Infrastructure investment is lower than expected, real estate demand does not recover as expected, and raw material prices rise.