Everbright Securities: Gives Tapai Group a buy rating

2021-11-03Sun Weifeng and Feng Mengqian of Everbright Securities Co., Ltd. conducted a study on the Tower Group and released a research report "2021 Third Quarter Report Review: Production Restriction Affects Short-term Performance, Price Rise Supports Annual Profit", This report gives a buy rating to Tower Group, and the current stock price is 10.17 yuan.

Tower Group (002233)

Event: The company released the third quarter quarter of 2021 quarterly report, the first three quarters of the realization of operating income of 5.242 billion yuan, the same increase of 12.11%; the net profit attributable to the mother of 1.312 billion yuan, the same decrease of 4.74%; the deduction of non-attributable net profit of 1.143 billion yuan, down 8.57%. In the third quarter alone, the company's revenue was 1.608 billion yuan, a decrease of 14.29%; the net profit attributable to the mother was 398 million yuan, a decrease of 13.32%.

Production restrictions led to a decline in sales, and coal prices rose to put pressure on profits: in the first three quarters, the company achieved cement production of 14.7906 million tons and sales of 14.5884 million tons, an increase of 15.53% and 19.36% respectively. However, due to the impact of the single q3 limited electricity production ration, the company's cement production was 4.3554 million tons and sales volume was 4.4943 million tons, which decreased by 19.64% and 17.77% respectively, resulting in a decline in revenue and profit in a single quarter. In addition, China's thermal coal prices will climb all the way in 2021, especially in the third quarter. Affected by the rise in coal prices, the company's average cost of cement sales in the first three quarters increased by 6.58% over the same period last year. The upward cost led to a decline in the company's single q3 consolidated gross profit margin by 6.06pct year-on-year to 36.80%, and profitability declined.

Cost pressure relief and product price increase, q4 or no fear of the impact of production restrictions: In October 21, the National Development and Reform Commission launched a regulatory policy for the rise of coal prices beyond the fundamentals of supply and demand, and coal prices have peaked and fallen, and have now fallen to the end of September, and there is still room for decline in the follow-up, and the company's cost pressure is expected to be alleviated. According to the company's announcement, the impact of the restricted production policy is expected to reduce cement production by about 2.5 million tons in Q4. However, production restrictions will also bring about a tightening of supply, which will further drive the price of cement. Cement prices in Guangdong Province have risen rapidly since September, rising to 840 yuan / ton on October 28, up 65.35% from the beginning of September. Under the combination of "volume reduction, price increase and cost reduction" in the fourth quarter, the annual performance of 21 years is still expected to achieve growth.

Demand is still expected to increase: the future stable growth of infrastructure is expected to be strong, and with the acceleration of special bond issuance, infrastructure investment is expected to see marginal improvement in the follow-up. Cement demand in eastern Guangdong is significantly affected by infrastructure, according to the national and Guangdong provincial government's development plan for the eastern Guangdong region, infrastructure construction will be a long-term task, and the construction of the "Guangdong-Hong Kong-Macao Greater Bay Area" will also bring radiation to the market in eastern Guangdong. As a cement leader in eastern Guangdong, the company's performance is still strong and resilient under the support of demand.

Earnings Forecast and Valuation Rating: With the recent rise in cement prices and the decline in fuel costs, and expectations of higher regional demand, full-year results are still expected. We maintained the company's 21-23 EPS at $1.67, $1.77 and $1.85, maintaining a "Buy" rating.

Risk warning: risk of regional demand decline; risk of fluctuation of raw material and coal prices; downside risk of cement prices; risk of production restriction policy exceeding expectations.

A total of 11 institutions have given ratings in the last 90 days, with 8 buy ratings and 3 overweight ratings; the average target price of institutions in the past 90 days has been 15.01; the Securities Star Valuation Analysis Tool shows that the good company rating of Tower Group (002233) is 3.5 stars, the good price rating is 4 stars, and the valuation comprehensive rating is 4 stars.