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On November 17, 2023, BBMG announced a plan to acquire a 10% stake in Easyhome for Rmb2.23bn.

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Strategic investment in Easyhome; enters strategic cooperation agreement. According to corporate filings, BBMG plans to acquire 628,728,827 shares of Easyhome New Retail Group Corporation Limited from Beijing Easyhome Investment Holding Group Co., Ltd. with its own funds at a price of Rmb3.55/sh (vs. closing price of Rmb3.56/sh on November 17). After the deal, BBMG would hold a 10.00% stake in Easyhome New Retail Group Corporation Limited. The companies also signed a strategic cooperation agreement on November 17.

Strong synergies likely thanks to respective advantages in industrial resources and commercialization platform. As a local SOE in Beijing, BBMG is a leading firm for construction material and real estate development in northern China. We believe BBMG has strong advantages in industries, resources and capital. Meanwhile, Easyhome specializes in furniture stores with mature, efficient, nationwide distribution networks and offline store resources for home furnishing and construction material products, and enjoys strong brand influence and mature commercialization platforms.

We expect strategic cooperation will create strong synergies, boding well for BBMG to expand and optimize its industry chains, and enhance its core competitiveness. Both firms have smart warehousing facilities in Beijing and Tianjin. We expect the firms to further optimize their logistics resources and improve logistics efficiency by integrating warehousing and industrial park resources. Moreover, we expect BBMG to leverage Easyhome’s stores to expand their sales channels for agency sales of sanitary ware, boding well for enhancing revenue and gross profit.

A positive for optimizing underutilized assets and industrial land, and further enhancing asset efficiency. We expect the strategic investment and cooperation will help BBMG optimize its assets and improve efficiency. BBMG has large commercial complex projects with underutilized space, which we think could facilitate Easyhome’s expansion and improve the utilization efficiency of BBMG’s property assets.

In addition, as of mid-2023, BBMG had a land bank of about 6.6mn sqm, much of which was underutilized industrial land. We see the potential for further development of this land, such as for construction of warehousing and logistics facilities. We think this may unleash the potential of BBMG’s underutilized assets.

2023 earnings under pressure due to imbalance in supply and demand conditions in cement sector. The cement sector suffered from imbalance in supply and demand conditions in 2Q23 and 3Q23 due to soft demand. As a result, downward pressure on fundamentals was more significant than expectation. The per-tonne earnings of the firm’s cement business faced heavy downward pressure, weighing on earnings performance. Cement prices have improved MoM since late-September, but momentum remained relatively weak.

Financials and valuation

As we lower our earnings assumptions for the cement sector, we cut our 2023 and 2024 attributable net profit forecast 96.6% and 56.4% to Rmb57mn and Rmb875mn. A-shares are trading at 25x 2024e P/E, and H-shares are trading at 8.6x 2024e P/E. We maintain OUTPERFORM ratings for A- and H-shares. We cut our A-share TP by 9% to Rmb2.80 (34x 2024e P/E with 38% upside), considering potential benefit from reconstruction of infrastructure facilities in northern China, development of affordable housing, potential synergies with Easyhome, and low valuation compared with its historical range. We maintain our H-share target price of HK$1.06, implying 12x 2024e P/E with 38% upside.

Risks

Disappointing demand recovery or synergies.