The Q3 reports of cement stocks are disappointing, but the turning point may be coming.
Affected by the real estate industry cycle and supply-demand imbalances, the profitability of China's cement industry has declined since the fourth quarter of 2021. To this day, the cement industry continues to fluctuate at historically low levels.
The downturn in the cement industry directly impacts corporate profits, leading to a loss of favor in the capital markets. The Hong Kong stock market's cement sector has been in a continuous decline over the past few years, with many stock prices hitting historical lows.
Q3 Earnings Under Collective Pressure
By the end of October, most listed cement companies had disclosed their Q3 2024 earnings reports.
Facing the challenges of "declining demand, low and volatile prices, and persistent industry losses," listed cement companies have been unable to escape the impact of the industry cycle, resulting in generally poor Q3 performance.
Among them, the industry leader $CONCH CEMENT(00914.HK) reported Q3 revenue of RMB 22.585 billion, down 32.89% YoY, and net profit of RMB 1.873 billion, down 15.13% YoY. The company's revenue and net profit for the first three quarters also fell by 31.27% and 40.05%, respectively.
Regarding the reasons for the performance decline, Anhui Conch Cement stated that it was mainly due to lower sales volume and prices of its cement products, leading to reduced revenue and profits YoY.
Wind data shows that Anhui Conch Cement's product sales peaked in 2020 and have been declining since, with 2023 sales volume roughly matching 2017 levels. As the largest cement company in China, Anhui Conch Cement's sales and profitability have been severely impacted, reflecting the industry's weak cyclical phase due to the real estate downturn and macroeconomic conditions. Naturally, no industry player is faring well.
Other cement companies' Q3 reports are equally grim. For example, $HX BLDG MAT(06655.HK) saw slight revenue growth but a sharp 40% drop in net profit in Q3.
Some companies even reported losses. $SHANSHUI CEMENT(00691.HK) saw a 22.4% decline in revenue for the first three quarters and recorded a net loss attributable to shareholders of RMB 118 million. Tianshan Materials (000877.SZ) swung from profit to a net loss of over RMB 3.7 billion in the first three quarters.
Anhui Conch Cement stated last month that shrinking volume and low prices have led to a continuous decline in industry profitability, characterized by "shrinking demand, fierce competition, low prices, and operational pressure."
Real estate stimulus policies are key to boosting cement demand. In the first three quarters of 2024, national real estate development investment totaled RMB 7.87 trillion, down 10.1% YoY, with the decline widening by 1 percentage point compared to the same period last year. Additionally, the YoY decline in new construction starts has been expanding. Coupled with intense price competition in the cement industry, these factors have put widespread pressure on the profitability of cement companies.
Policy Tailwinds Arrive, Industry-Wide Price Hikes
The recovery of the cement industry's profitability hinges on whether real estate can return to a healthy development track. Additionally, improvements in infrastructure markets are another critical support for the industry's rebound.
Recently, external conditions for the cement industry have shown signs of improvement, suggesting the industry may be bottoming out.
On the policy front, the Ministry of Housing and Urban-Rural Development has summarized its real estate stabilization policies as "four cancellations, four reductions, and two additions," including lifting purchase restrictions, lowering down payment ratios and mortgage rates, and launching urban village redevelopment and dilapidated housing renovation projects.
A month after the new policies took effect, first-tier cities have seen strong performance, with Shenzhen's primary and secondary home transactions doubling and Shanghai's new home sales hitting a six-month high. As policies aimed at "halting the decline and stabilizing the real estate market" continue to take effect, market confidence is being restored. The revival of real estate transactions is expected to benefit upstream and downstream industries, with cement likely being one of the beneficiaries.
Moreover, since Q2, cement companies have been eager to raise prices to improve profitability.
According to China Cement Network, starting September 27, 2024, cement clinker prices in East China are set to rise sharply by RMB 100 per ton, marking a rare positive signal for the struggling industry.
Led by East China, national cement prices have been rising for a month. Data from China Cement Network shows that the national cement price index reached 128.87 points on October 22, up about 12% from early September.
East China saw the largest price increases. Wind data shows that the average price of 42.5-grade cement in East China surged over the past month, breaking the RMB 500/ton mark on October 18, hitting a new high since April last year.
Everbright Securities recently noted in a research report that with production curbs in place and the peak construction season approaching, coupled with policies boosting real estate and infrastructure demand, as well as upcoming carbon reduction measures, the price hikes in East China are likely to hold, with other regions following suit. This could pave the way for a recovery in corporate profitability.
Summary:
The weak Q3 performance of listed cement companies reflects the impact of multiple factors, including market demand, price competition, and environmental policies. However, this could also accelerate industry consolidation, benefiting long-term healthy development—a positive for leading companies.
Real estate policy support and industry-wide price hikes are providing momentum for recovery, laying the groundwork for improved supply-demand dynamics and valuation restoration.
In the past, several leading cement companies have gained market attention and trust for their strong performance. Anhui Conch Cement, Shanshui Cement, Huaxin Cement, Asia Cement (China) (00743.HK), and West China Cement (02233.HK) have all been featured in the "HK Top 100" list.
The 2024 Hong Kong Listed Companies Development Summit Forum and the 11th "HK Top 100" Awards Ceremony, organized by the HK Top 100 Research Center and co-hosted by Caijinghua and Futu, with support from media groups like Hong Kong Ta Kung Wen Wei Media Group, will be held on the afternoon of November 11, 2024, at the Hong Kong Convention and Exhibition Centre. As the cement industry approaches a cyclical turning point, which companies will make the latest "HK Top 100" list? Stay tuned.
Author: Yao Yuan
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