1Q25 adjusted results in line with our expectations

In 1Q25, revenue rose 1.10% YoY to Rmb7.16bn, and net profit attributable to shareholders grew 31.80% YoY to Rmb234mn, missing market expectations. Although earnings of the domestic cement business improved notably as evidenced by gross margin, the sharp YoY increase in financial expenses1 weighed on earnings. If the fluctuation in financial expenses is added back, 1Q25 earnings would be about Rmb400mn, largely in line with our expectations.

We believe domestic gross profit per tonne of cement improved considerably in 1Q25 thanks to nationwide price recovery and falling

coal prices: Thanks to sharp cement price hikes in the peak season in 4Q24, according to digitalcement.com, the industry average prices in central and southwest China (the firm’s key markets) rose more than Rmb40/t YoY to Rmb387/t and Rmb383/t (tax included) in 1Q25.

Meanwhile, thermal coal prices declined in 1Q25. As such, the firm's blended gross margin rose 4.2ppt YoY to 26.1%. We estimate that its domestic gross margin per tonne improved by more than Rmb30/t in 1Q25.

Financial expenses rose sharply and regular expenses remained

stable: Excluding financial expenses (up Rmb130mn YoY, likely due to FX losses), expenses remained stable, with selling, G&A and R&D expense ratios at 5.3% (-0.3ppt YoY), 6.4% (-0.1ppt QoQ) and 0.4% (largely flat QoQ), respectively, in 1Q25.

Cash flow slightly under pressure: The firm recorded a net operating

cash outflow of Rmb106mn in 1Q25 (vs. a net inflow of Rmb107mn a year earlier).

Trends to watch 2025 recurring earnings of domestic business to improve

substantially. China's cement demand fell only 1.4% YoY in 1Q25, much better than the market expected at the beginning of 2025. We think the implementation of the debt reduction policy and front-loaded fiscal spending have produced a positive effect on physical infrastructure construction. In our view, full-year cement demand in 2025 is likely to beat expectations. In addition, we believe the new supply-side capacity　　replacement regulations may restrain the industry's excessive production, and the industry consensus has been strengthened. Coal prices have declined by more than Rmb100/t YoY. In our view, earnings of the firm's domestic cement business may improve substantially in 2025, and the volume and prices of aggregates could remain stable.

Overseas business has sustained growth potential. The firm aims to

become a global cement leader through both M&A and self-construction.

The firm has entered 13 countries in East and West Africa, Central Asia, the Middle East, Southeast Asia, and South America (ownership transfer procedures for the Nigerian cement project is scheduled to be completed in 2025, and the South American project was consolidated into the firm’s 1Q25 results). The firm's overseas production bases have all been profitable so far, and its EBITDA and net profit have grown steadily for years. We remain upbeat on the growth potential of the firm's overseas business in the medium term and reiterate it as our top pick in the medium term.

Financials and valuation

We maintain our 2025 and 2026 net profit forecasts, and the stock is trading at 11.4x and 8.7x 2025e and 2026e P/E. We maintain an OUTPERFORM rating and our target price of Rmb16, implying 14x and 11x 2025e and 2026e P/E and offering 26.5% upside.

Risks

Worsening overseas competitive environment; sharper-than-expected decline in domestic demand.