Rating: ACCUMULATE* (Initiation)

Target price: RMB7.75

Share price (2 Sep): RMB7.20

Market Cap (RMBm): 9,648.0

Up/downside: 7.6%

We initiate coverage of Yasha Decoration with an ACCUMULATE call and PT of RMB7.75 (7.6% upside potential). 1H21 revenue came to RMB5.31bn, up 36.77% yoy, net profit was RMB99m, down 18.39%yoy, and core net profit fell 17.76%. 2Q revenue was RMB3.38bn, up 40.55% yoy, and net profit was RMB30m, down 54.67%yoy. Given the assembly and decoration industry boom, we expect its sufficient order book to sustain long-term net profit growth.

Order book focused on public installations; curtain walls/smart systems uptrend

The company signed new contracts amounting to RMB9.28bn in 1H21, up 18.90% yoy, comprising public facility installations/ residential/ decoration & design/ decoration products at RMB5.9bn/3.03bn/131m/211m. Public installations/residential orders in hand grew 24.21/10.49%. We think its focus shift to public installations was driven by  worsening real estate growth. As Yasha continues to tweak its order mix, the impact of its impairment loss could weaken gradually. By segment, 1H21 revenues in architectural design & engineering/ curtain walls/ intelligent system integration grew 18%/93%/60% yoy and 4%/23%/50% from 1H19. The curtain wall and intelligent system businesses developed well.

2Q21 higher impairment loss dragged profit

1H21 total gross profit margin was 13.13% (-2.34ppt yoy), with architectural design & engineering/curtain walls GPM at 13.23%/10.05% (-2.25/-2.26ppt). 1H21 sales/ management/ R&D/ financial expense ratios were 2.98/ 3.21/ 2.84/ 0.57% ( 0.55/  0.68/ +0.27/ -0.41ppt yoy). Asset impairments and allowances came to RMB51m, accounting for 0.97% of revenue, up 0.24ppt yoy; 2Q21 asset impairments and allowances came to RMB106m, accounting for 3.15% of revenue, which was the main reason for the decline in profit. 1H21 net margin came to 2.04%, down 1.19ppt yoy. Cash ratio in 1H21 was at 104.41%, down 2.39ppt yoy: cash payment ratio was 92.78%, down 18.69ppt yoy. Cash flow: net CFO was at negative RMB1.05bn, increasing by RMB13m yoy. Balance sheet: 1H21 gearing ratio was 60.97%, up 1.44ppt yoy. 1H21 total assets turnover rate was 0.24x, an increase of 0.06x yoy.

Leader in industrial assembly market

The company has a mature operations model in the industrial assembly. Through optimization and improvements in materials, production, design, construction and other aspects, it now holds precise control over the industrial assembly supply chain. From model houses in China to contemporary Puyu projects in Chengdu, Yasha promotes industrial assembly products from city markets to regional markets. Taking into account the impact of impairment loss, we forecast 2021/22/23E net profit of RMB410m/530m/630m. Relatively to a peer PE of 16.81x in 2021E, we assign to Yasha a PE of 25x, deriving a target price of RMB7.75.

Risks include: order repayment, assembly decoration business promotion and project execution falling below expectations.

* Note: The investment ratings given by TFI Asset Management Limited may have taken reference to the research report previously issued by other entities of the TF Group.  For details, please contact us at research_tfi@tfisec.com.

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