1Q26 results miss our expectations

The firm announced its 1Q26 results: Revenue fell 6.33% YoY to about Rmb9.51bn, net profit attributable to shareholders fell 31.43% YoY to Rmb455mn, and recurring net profit slid 27.81% YoY to Rmb432mn. The firm's 1Q26 results missed our expectations, mainly due to: 1) Sustained weak cement market in China; 2) falling revenue due to the impact of the international situation; and 3) FX losses caused by depreciation of the US dollar and the euro, eroding the firm’s profit.

New orders slightly under pressure in 1Q26; operation and maintenance business grows steadily. In 1Q26, the firm's new orders fell 8% YoY to Rmb25.55bn, with new orders for engineering, equipment, and operation & maintenance businesses at Rmb18.16bn (-13% YoY), Rmb2.43bn (-16% YoY), and Rmb4.25bn (+12% YoY). By region, new contracts for domestic and overseas businesses totaled Rmb8.48bn (+21% YoY) and Rmb17.07bn (-18% YoY) in 1Q26.

Profitability was slightly under pressure, and FX losses eroded profit. In 1Q26, gross margin was 16.43% (-0.5ppt YoY), and overall expense ratio was 10.8% (+2ppt YoY), with selling, G&A, R&D, and financial expense ratios +0.05ppt, +0.8ppt, -0.03ppt, and +1.1ppt YoY, respectively. Financial expenses were Rmb59mn (vs. -Rmb48mn in 1Q25), mainly due to FX losses caused by depreciation of the US dollar and the euro (vs. FX gains in 1Q25).

Net cash outflow narrowed. Net operating cash outflow fell Rmb650mn YoY to about Rmb1.22bn in 1Q26, mainly due to increased project advances and progress payment collection.

Trends to watch

We believe overseas cement capex is still in an upward cycle. The firm can leverage its large market share in the cement engineering market to accelerate the penetration rate of its equipment, operation and maintenance businesses. We suggest keeping an eye on the pace of conversion of its overseas orders. In China, the Ministry of Ecology and Environment has proposed to complete ultra-low-emission renovation of 100mn tonnes of cement and clinker production capacity by 2026. In addition, the firm has developed advanced technologies for coproduction of cement from phosphogypsum to acid. Rising sulfuric acid prices may considerably improve the cost effectiveness of phosphogypsum-to-acid projects, in our view. We expect capex demand from related phosphochemical companies to increase, which may boost relevant orders for phosphogypsum treatment.

Financials and valuation

Considering that geopolitical conflicts in the Middle East have led to a slowdown in the advancement of overseas projects, we lower our 2026 earnings forecast 1.3% to Rmb2.96bn and raise our 2027 earnings forecast 1.4% to Rmb3.14bn. The stock is trading at 8.8x and 8.3x 2026e and 2027e P/E. We maintain an OUTPERFORM rating and target price of Rmb12.5, implying 11.1x and 10.4x 2026e and 2027e P/E and implying 25.3% upside.

Risks

Fulfillment of overseas contracts surprises on the negative side; expansion of equipment and operation & maintenance businesses disappoint.