Incident: The company released its 2022 annual report and the first quarter report of 2023. It achieved revenue of 897 million yuan for the full year of 2022, an increase of 33.85%; achieved net profit of 100 million yuan to the mother, an increase of 14.60%; and achieved net profit of 102 million yuan after deducting non-return to the mother, an increase of 26.51%. Looking at a single quarter, the company achieved revenue of 244 million yuan in 2024, an increase of 16.01%; it achieved net profit of 21 million yuan to the mother, an increase of 137.31%. 2023Q1 achieved revenue of 127 million yuan, a decrease of 44.29%; achieved net profit of 4,068,800 yuan, a decrease of 87.50%; net profit of the non-return mother was 3.3795 million yuan, a decrease of 89.61%.

Business outside the province continued to develop, driving revenue growth in 202Q4: On the revenue side, the company achieved a 16% increase in revenue in 202Q4. The slowdown in growth compared to Q3 was mainly due to the impact of the epidemic on the construction side and delivery side, but the company's steady promotion of business expansion across the country led to an increase in revenue. By product, seismic isolation products/shock absorber products achieved revenue of 605/281 million yuan respectively in 2022, +25.21%/+59.03%, respectively. The significant increase in shock isolation and shock absorption products was mainly due to the continuous development of business outside the province after the regulations were implemented, which led to an increase in sales of seismic isolation bearings and energy dampers. Revenue from the out-of-province business in 2022 increased 54.77% to 614 million yuan, accounting for 68.42% of total revenue, an increase of 9.25pct.

The decline in raw material prices increased the gross profit margin of 2022Q4, and financial expenses and accruals affected the net interest rate: on the profit side, the company's overall gross margin in 2022 was 42.21% +0.53pct compared to the previous quarter; looking at a single quarter, the company's 202Q4 gross margin was 41.14% +7.97pct year-on-year. Q4 The same increase in gross margin was mainly due to a marginal decrease in raw material costs. The average market price of 2022Q4 hot-rolled coils was 4130 yuan/ton -22% compared to the same period last year. Looking at spin-off profits, seismic isolation products/shock absorption products achieved gross profit margins of 43.17%/38.25% respectively in 2022, up to +1.54 pct/-1.57 pct respectively. The increase in seismic isolation gross margin was a decrease in steel costs, and a decrease in shock absorption gross margin was due to increases in fixed costs such as plant leasing. On the cost side, the sales/management/R&D/finance expense ratio in 2022 was 10.6%/5.7%/3.2%/1.9%, respectively, compared to -3.4pct/-1.3pct/-0.4pct/+1.6pct respectively. The sharp increase in financial expenses was mainly due to interest expenses on convertible bonds included in current profit and loss. In 2022, the company's asset and credit impairment loss was $59 million, and the asset and credit impairment loss rate was 6.6%, an increase of 3.4 pct over the previous year. Mainly due to the low level of construction sentiment, there was a risk that construction customers would be in arrears with the company's purchase payments because they were unable to receive construction payments in a timely manner, so there was a certain age accrual. Net interest rates declined due to increased financial expenses and accruals. The company's net interest rate to the parent in 2022 was 11.17%, -1.88pct compared to the previous year.

Increased sales and falling costs led to 2022 Q4 operating cash flow recovery: the company's net cash outflow from operating activities in 2022 was 38 million yuan, a net outflow of 145 million yuan over the previous year. The company's Q4 net operating cash flow in a single quarter was 6.76 million yuan with a net inflow of 114 million yuan. Increased channel development sales and falling costs led to cash flow recovery. The company's payout ratio in 2022 was 73% year-on-year - 4.3pct; payout ratio was 84%, year-on-year - 33.3 pct.

Influenced by the boom in the construction industry, the company is expanding the market while evaluating customer risks, formulating different collection policies for different customers, and strictly controlling the risk of repayment of accounts receivable.

Shipments have slowed during the Spring Festival holiday, and 2023Q1 revenue and profits are under pressure: Since 2023, due to the impact of slow delivery requirements from customers during the Spring Festival holiday or requests for delayed delivery, revenue confirmation has slowed, and the shipping side is under pressure. The company's 2023Q1 revenue also fell 44.29%. However, since March, there has been a marked increase in new orders, and market demand has already begun to be released, which is expected to drive continued recovery on the revenue side in the future. The company achieved a gross profit margin of 37.37% year-on-year of -0.13pct in 2023Q1, mainly due to depreciation from the company's construction project consolidation plan. On the cost side, the 2023Q1 sales/management/R&D/finance expenses ratio was 17.3%/12.5%/5.4%/4.7%, respectively, compared to +6.0pct/+8.6pct/+3.4pct/+3.4pct/+3.7pct, respectively. The increase in the fee rate during the period was mainly due to lower income, while the increase in financial expenses was mainly due to the increase in interest costs on convertible bonds. The company stepped up its debt collection efforts in 2023Q1. The repayment of long-age project accounts receivable and the repayment of bad debts led to a recovery of 7.72 million yuan in the company's assets and credit impairment in 2023Q1. The net interest rate declined due to the slowdown in shipping, consolidation under construction, and the increase in interest costs. The net interest rate of the 2023Q1 company to the parent company was 3.20%, -11.05 pct compared to the previous year. As of the end of Q1, the company's accounts receivable and notes, inventory, accounts payable and notes, advance accounts receivable and contract liabilities amounted to $849/3.10/257/141, compared to -0.6%/+10.9%/+0.6%/+0.6%/+26.6% at the beginning of the year.

Policies drive the expansion of the industry, and wait for the shock absorption penetration rate to increase after the implementation of the “Anti-Regulations” and “Guidelines”:

The “Regulations on the Management of Seismic Resistance in Construction Projects” began to be implemented in September 2021, leading to significant expansion of the industry. Currently, high intensity regions are performing well. In medium to low intensity regions, many provinces and cities, such as Sichuan Province, Nanjing City in Jiangsu Province, and Zhengzhou in Henan Province, have implemented regulations one after another. The “Seismic Design Code for Buildings” and the “Seismic Technical Guidelines Based on Maintaining the Function of Building Normal Use” were released in December 2021. Subsequent publication of the “Anti-Regulations” and the official documents of the “Guidelines” are expected to accelerate the implementation of seismic isolation applications in some cities and further increase the seismic damping penetration rate. The company took the lead in channel-side roving and speeding up the expansion progress of design institutes across the country, which is expected to drive long-term performance improvements.

Investment advice: As the industry takes off, the company has a significant first-mover advantage as a leader in building barrier mitigation. Channel construction enhances customer stickiness and educates consumers. The medium- to long-term market share is expected to increase, and short-term decline in raw material prices is expected to improve profitability. We predict that the company's net profit to the mother in 2023-2025 will be 187/3.35/508 million yuan, the year-on-year growth rate in 2023-2025 will be 86.07%/79.35%/52.02%, the corresponding EPS will be 0.75/1.35/2.06 yuan/share respectively, and the latest closing price corresponds to 2023-2025 PE 47x/26x/17x respectively, maintaining the “increase in holdings” rating.

Risk warning: policy implementation falls short of expectations; market competition intensifies; market expansion falls short of expectations