In 2022, the company achieved revenue growth of 0.89% year on year. Among them, infrastructure engineering revenue increased 9.13% year on year, which is resilient; Guimu's net profit increased 62.96% year on year, and asset disposal revenue increased profits. We estimate that the net profit of the subsidiary Zhejiang Jiaogong increased 21.63% year-on-year after excluding the impact of land disposal revenue. In an uncertain environment, the company achieved a sharp increase in cash flow from operating activities. The revenue ratio reached a new high since 2018, achieving a better quality of operation. We expect that in the next three years, as the infrastructure of Zhejiang Province and the majority shareholders increase, the company's revenue is expected to grow relatively rapidly, and there is room for profit margins to improve. Maintain a “buy” rating.
Issue: The company released its 2022 annual report, and asset disposal revenue increased profits.
The operating situation of Zhejiang Jiaotong Technology: In 2022, the company achieved revenue of 46.47 billion yuan, an increase of 0.89% over the previous year; the net profit of Guimo was 1,578 billion yuan, an increase of 62.96% over the previous year; after deducting net profit of 1,281 billion yuan from the non-return mother, an increase of 33.81% over the previous year. The non-recurring income mainly comes from the company's confirmation that the government's expropriation of asset disposal income from Zhejiang Jiaogong land and investment income from chemical equity transfers brought in 312 million yuan from disposal of non-current assets. 2022Q4, the company achieved revenue of 14.297 billion yuan, a year-on-year decrease of 11.32%; net profit of returned mother was 583 million yuan, an increase of 93.93% over the previous year; after deducting net profit of 494 million yuan, an increase of 63.32% over the previous year.
Operating conditions of the subsidiary Zhejiang Jiaogong: Net profit increased 21.63% year-on-year after excluding the impact of land disposal revenue.
Zhejiang Jiaogong, a wholly-owned subsidiary of the company, is the main operator of the company's infrastructure engineering business. In 2022, Zhejiang Jiaogong achieved revenue of 46.042 billion yuan, an increase of 9.11% over the previous year; net profit was 1,552 billion yuan, an increase of 30.28% over the previous year.
We estimate that if we exclude the impact of 137 million yuan of asset disposal revenue brought about by the government's expropriation of Zhejiang Jiaogong land, Zhejiang Jiaotong's net profit increased by 21.63% over the same period last year.
Revenue: The main infrastructure engineering business is resilient, and divestment of the chemical business affects total revenue. The company's revenue increased 0.89% year-on-year in 2022. The main drag was due to the company divestment of the chemical business and focus on infrastructure engineering in 2022Q1. The revenue contributed by the chemical business was drastically reduced. Revenue from the main infrastructure engineering business increased 9.13% year-on-year, showing resilience in difficult conditions brought about by factors such as the epidemic and extreme temperatures.
Operating profit margin: 1) Gross profit margin: The main infrastructure engineering business was under pressure throughout the year, showing an improvement trend in the second half of the year. In 2022, the company's gross margin fell 0.45pct to 8.12% year on year. Among them, the gross margin of the infrastructure engineering business fell 0.37pct to 8.01% year on year. We estimate that the gross margin of infrastructure projects in 2022 H1/H2 is 7.12%/8.70%, respectively, and -1.23/+0.30pct respectively. As the prices of raw materials such as cement, steel, asphalt, etc. have declined sequentially since the second half of last year, the gross margin of infrastructure projects has improved year on year. 2) Expense rate: The control is good, and there has been an overall decline.
In 2022, the company's expense ratio decreased by 0.76pct year on year. Among them, the R&D/finance/sales/management expenses ratio decreased by 0.25/0.42/0.03/0.06pct year-on-year respectively, mainly due to the company's good cost control, divestment of chemical business, and increased interest income.
Cash flow: Cash flow from operating activities increased dramatically, and the revenue ratio was at a record high. In 2022, the company achieved operating cash flow of 1.05 billion yuan, a sharp increase of 680 million yuan over the previous year. The company's revenue ratio reached 0.98 in 2022, a new high since 2018, reflecting the effects of the company's strict risk control and strengthened project measurement and receivables management in the face of an uncertain environment.
Future highlights: 1) The revenue side is expected to benefit from Zhejiang Province and the majority shareholder's investment in transportation infrastructure: Looking at Zhejiang Province, according to the Zhejiang Provincial Department of Transportation, Zhejiang Province completed comprehensive transportation investment of 340 billion yuan in 2022, and aims for 360 billion yuan in 2023. To complete the 2 trillion yuan plan for the “14th Five-Year Plan” period, we estimate that Zhejiang Province will need an average annual transportation investment of 492 billion yuan in 2024-2025; judging from Zhejiang Transportation Investment Group, the majority shareholder, according to the Group's official website, the Group completed transportation infrastructure in 2022 Facilities are invested 79.5 billion yuan, and the 2023 target is 82.9 billion yuan. To complete the 500 billion yuan plan for the “14th Five-Year Plan” period, we estimate that an average annual investment of 127 billion yuan will be required from 2024-2025. As a result, transportation infrastructure investment in Zhejiang Province and the majority shareholders are expected to increase significantly from 2024-2025, and although the 2023 investment target did not set high growth requirements, we expect that many infrastructure investments last year that were not fully converted into physical workload due to factors such as the pandemic and extreme heat will accelerate this year. Considering that 80% of the company's revenue in 2021 came from Zhejiang Province, and 41% of infrastructure project revenue came from major shareholders and affiliated parties (Source:
(Zhejiang Jiaotong Technology Announcement, Annual Report), the company is expected to benefit from Zhejiang Province and its majority shareholders from speeding up infrastructure development. 2) There is room for improvement in profit margins: As the cost of raw materials for building materials fell in the second half of last year and the company continued to strengthen quality and efficiency improvements and collaboration with the majority shareholders' platform resources, there was room for improvement in the company's profit margin.
Risk factors: The increase in the physical workload of transportation infrastructure in Zhejiang Province fell short of expectations; the increase in company orders fell short of expectations; the increase in the company's profit margin fell short of expectations; and the company's business extension fell short of expectations.
Profit forecasting, valuation and rating: The company is the leading infrastructure provider in Zhejiang Province. We expect that in the next three years, as the infrastructure of Zhejiang Province and the majority shareholders increase, the company's revenue is expected to grow rapidly, and there is room for profit margins to improve.
Considering the positive recovery in gross margin since the second half of 2022, we adjusted the 2023-2024 net profit forecast to 1,645/1,984 billion yuan (the original forecast was 1,456/1,942 million yuan), and added the 2025 net profit forecast of 2,421 billion yuan. Considering that 2018 is the first complete year after the company's restructuring and listing, we refer to the company's PB valuation center 1.0x from 2019 to date, and gave the 2023 1xPB, corresponding target price of 7.8 yuan, maintaining the “buy” rating.