Incident: The company released its 2022 annual report.

Performance has improved steadily, and new orders have increased dramatically. The company achieved operating income of 14.084 billion yuan in 2022, an increase of 23.60% over the previous year, net profit of 568 million yuan, an increase of 6.11% over the previous year, and net profit of Fumo was 430 million yuan after deduction, a decrease of 0.29% over the previous year. Among them, revenue from construction projects was 13.722 billion yuan, an increase of 22.11%; sales revenue of asphalt concrete and related products was 64 million yuan, a decrease of 42.60% over the previous year; and revenue from the consolidated design survey and consulting business was added 235 million yuan. The increase in revenue is mainly due to the fact that construction projects achieved more work than in the same period last year and the new merger of the Pudong Design Institute. Benefiting from the opportunities brought to the Pudong New Area by the Yangtze River Delta integrated development strategy, reform and opening up, etc., the amount of new projects signed by the company in 2022 was 16.570 billion yuan, an increase of 14.96% over the previous year. The total amount of newly signed projects was 974 million yuan, an increase of 577.63% over the previous year, accounting for 5.88%. The amount of new infrastructure and housing projects signed increased 4.71% and 12.71% year-on-year, accounting for 38.50% and 55.62% respectively. In the first quarter of 2023, the total amount of new projects signed by the company was 9.714 billion yuan, an increase of 80% over the previous year.

Gross margin declined slightly, and cash flow performance was excellent. The company's comprehensive gross margin in 2022 was 7.52%, down 0.2 pct from the previous year. By industry, the gross margin of the design survey consulting business was high, reaching 25.92%, and the gross margin of sales of asphalt concrete and related products was 11.72%, an increase of 2.81 pct over the previous year. The company's sales expenses increased by 3,778,500 yuan in 2022, mainly due to a decrease in real estate advertising and sales agency fees. Management expenses increased 28.52% year-on-year, mainly due to the increase in employee remuneration, depreciation and amortization expenses after the merger of the Pudong Design Institute. Financial expenses increased 265.396 million yuan over the same period last year, mainly due to an increase in interest-bearing debt. The company's net operating cash flow inflow in 2022 was 2,452 billion yuan, an increase of 1,550 million yuan over the previous year. The cash flow performance was excellent. The main reason was the increase in cash received from the sale of goods and the provision of labor services. The company's revenue ratio increased 13.01 pct to 104.78%.

The acquisition of design assets extends the industrial chain, building on the Pudong New Area and covering the Yangtze River Delta. The company completed the equity acquisition of Pudong Design Institute in 2022, successfully extending the industrial chain upward to the field of architectural design, achieving an industrial chain layout integrating “investment+design and construction+park development and operation”, while enhancing the company's performance. Based in Shanghai's Pudong New Area, the company is actively developing business in the Yangtze River Delta region and increasing its investment in the Yangtze River Delta region, with a cumulative investment of over 30 billion yuan.

In terms of engineering construction, construction of a series of major public infrastructure projects has been completed, including expressways, backbone roads, elevated overpasses, and urban road networks, high-grade highways, parking lots, waste incineration plants, and guaranteed housing in the Yangtze River Delta region, including Shanghai's Pudong New Area, Wuxi, Changzhou, and Zhuji.

Investment suggestions: The company benefits from the Yangtze River Delta integrated development strategy, reform and opening up and other opportunities to acquire design assets to expand the industrial chain. The company's revenue in 2023 is estimated to be 16.248 billion yuan, an increase of 15.36% over the previous year, net profit of 713 million yuan, an increase of 25.56% over the previous year, EPS is 0.73 yuan/share, and PE corresponding to the current stock price is 9.63 times that of the current stock price, maintaining the “recommended” rating.

Risk warning: the risk that the order will fall short of expectations; the risk that the Yangtze River Delta integration strategy will fall short of expectations.