2021 earnings slightly miss our expectation

Qilianshan Cement announced its 2021 results: Revenue decreased 1.8% YoY to Rmb7.67bn, attributable net profit fell 34.1% YoY to Rmb948mn, and recurring net profit dropped 36.7% YoY to Rmb961mn. In 4Q21, revenue rose 3.1% YoY to Rmb1.85bn, attributable net loss equaled Rmb6mn, and recurring net profit declined 75% YoY to about Rmb14mn.The company's 2021 results missed our expectation, due to high coal prices and lower gross profit per tonne than we expected.

1) Production and sales volume declined. The company's cement　clinker sales volume in 2021 dropped 0.8% YoY to 23.54mnt, and cement production declined 1.4% YoY to 22.66mnt. We attribute this to Qilianshan Cement’s sluggish operation and low cement output amid the COVID-19　resurgence. 2) Gross profit per tonne and net profit per tonne both　dropped. Cement clinker revenue in 2021 was Rmb300/t, largely flat YoY.Cost increased Rmb27.4/t YoY to Rmb215/t, mainly due to increased coal prices. Gross profit decreased Rmb27.6/t YoY to Rmb85/t, and attributable net profit declined Rmb20.3/t YoY to Rmb40/t. 3) Expenses were stable　and the asset structure was optimized. Expenses fell Rmb0.1/t YoY to　Rmb31.9/t, selling expenses increased Rmb0.7/t YoY to Rmb3.8/t, and G&A expenses dropped Rmb0.8/t YoY to Rmb28.2/t. At end-2021 the company's asset-liability ratio was 21.9% (largely flat YoY), and its interest-bearing debt ratio equaled 17.1% (down 1.6ppt YoY). 4) Net　operating cash flow came under pressure due to higher costs.Qilianshan Cement's net operating cash flow in 2021 decreased Rmb0.83bn YoY to Rmb1.45bn, mainly due to rising materials prices and the increase in restricted funds (cash paid for goods and services in 2021 increased Rmb1.33bn YoY to Rmb3.69bn, and inventory as of end-2021 rose Rmb0.34bn YoY to Rmb0.83bn).

Trends to watch

The median of prices is rising; market is gradually recovering.According to Digital Cement, cement ASP in Gansu and Qinghai provinces in 1Q22 increased 26% YoY to about Rmb574/t, approaching the highest level in the same period of the past three years. We see downward pressure on cement prices after cement factories resume operation.However, we believe prices will remain relatively high. Cement shipment rate in Gansu and Qinghai provinces has grown to 30%. We expect demand from the downstream construction sector to gradually recover.

Backed by pro-growth policies, 2022 performance will likely remain solid; aggregate business should gain strong momentum. We believe　that pro-growth policies will be intensified in 2022, and engineering projects will contribute cement demand in Gansu and Qinghai.Considering that the growth in infrastructure investment will likely boost construction demand, we expect cement demand in Gansu and Qinghai in 2H22 to be stronger than demand in 1H22. In our opinion, if coal prices drop, Qilianshan Cement's earnings will likely remain stable throughout 2022. In addition, the company's aggregate sales reached 1.37mnt in 2021 (up 51.5% YoY), with a gross margin of 35.4% (up 5.6ppt YoY). We expect to see additional revenue and earnings from its aggregate business.

Financials and valuation

Given uncertainties on the cost side and the demand side, we lower our 2022 attributable net profit forecast 29.2% to Rmb953mn, and introduce our 2023 attributable net profit forecast of Rmb1.04bn. The stock is trading at 8.1x 2022e and 7.4x 2023e P/E. We maintain an OUTPERFORM and　lower our target price 4.5% to Rmb12.8 (10.4x 2022e and 9.6x 2023e　P/E with 29% upside), reflecting impacts of demand from key construction projects in Gansu and Qinghai on the company’s performance.

Risks

Cement demand is lower than we expected; coal prices are higher than we expected.