The results for the first three quarters fell short of our expectations
Zhenan Technology announced 3Q22 results: revenue for the first three quarters was 650 million yuan, up 42.0% year on year, net profit of 78.79 million yuan, up 0.5% year on year; revenue in the third quarter was 220 million yuan, up 73.5% year on year, and net profit of 24.15 million yuan, up 85.5% year on year; since revenue growth in the first three quarters was constrained by downstream demand, the first three quarter results fell short of our expectations.
3Q22 The company achieved a gross profit margin of 42.9%, the same year-on-year; the cost ratio for the four periods decreased by 1.8ppt to 23.1% year-on-year, of which sales and management expense ratios decreased by 5.1 ppt, 3.0 ppt to 10.8%, and 6.8%, respectively; total asset and credit impairment losses amounted to 12.29 million yuan, up 160.4% year on year; and return to Mo net interest rate of 10.9%, up 0.7 ppt year on year. 3Q22 The company's net operating cash outflow was 85.85 million yuan (net inflow of 22.66 million yuan for the same period last year). We believe this was mainly due to the rapid increase in accounts receivable; the net outflow of invested cash was 13.72 million yuan, narrower than the net outflow of 30.41 million yuan in the same period last year.
Development trends
Revenue growth accelerated marginally in the third quarter. Focus on the implementation of earthquake resistance management regulations. 3Q22's revenue increased 73.5% year on year, which is faster than the first half of the year (1Q22 and 2Q22 quarterly revenue +51.0% and +12.2%, respectively, compared to the same period. We believe it mainly benefited from increased orders and increased sales revenue for seismic isolation and shock absorption products. We suggest following the progress of implementation of the “Seismic Management Regulations for Construction Projects”: on the one hand, from a subregional perspective, we believe that the market space for seismic reduction and insulation products in high-intensity regions has expanded since the regulations were introduced. We suggest continuing to pay attention to the implementation of the regulations in medium- and low-intensity regions; on the other hand, since the second half of last year, the commencement of large-scale projects in some southwest and northwest provinces has been delayed by the epidemic. We believe that with its leading competitive advantage in the industry, the company maintains sufficient on-hand orders. It is recommended to pay attention to the subsequent landing of new orders signed by the company and the revenue conversion of existing projects.
A draft of new equity incentives was issued, demonstrating confidence in development. On September 30, the company disclosed the draft restricted stock incentive plan for 2022. It is proposed to grant 1.68 million shares at 28.3 yuan/share. The incentive targets include 101 people including directors, executives, and core cadres. The company's performance requirements (trigger value) for employees to receive shares are: 2022/2023/2024 annual deduction of non-net profit increased by 24%/76%/154% compared to 2021, implying a 24%/76%/154% increase in net profit for 2022/2023/2024. The equity incentive plan has a wider range of incentives and more reasonable assessment conditions than the 2020 plan (non-net profit is selected). We believe it is expected to further incentivize the core team and demonstrate management's confidence in the company's future growth.
Profit forecasting and valuation
As the implementation of the current seismic regulations fell short of expectations, we lowered the company's net profit forecast for 2022/2023 by 37%/48% to 150 million yuan/230 million yuan. The current stock price corresponds to 50 times the price-earnings ratio in 2023. Due to lower profit forecasts, we lowered our target price by 24% to 55 yuan, corresponding to a price-earnings ratio of 59 times in 2023 and 20% room for growth, maintaining our outperforming industry rating.
risks
The implementation penetration rate of the regulations fell short of expectations.