Huajian Group issued an announcement: 2023Q1, the company achieved operating income of 1,686 million yuan, an increase of 7.41% over the previous year; the net profit returned to the mother and non-net profit was 0.88/77 million yuan respectively, up 0.86%/42.70%, respectively; gross sales margins and net profit after deducting non-net interest were 22.53%/4.56% respectively, an increase of 1.04pct/1.12pct over the previous year.

Key points of investment

Record high after deducting non-net profit, performance bucked the trend

Revenue side: In 23Q1, the company achieved revenue of 1,686 billion yuan, an increase of 7.41% over the previous year.

Profit side: 1) The company achieved net profit of 0.88/77 million yuan respectively, up 0.86%/42.70%, respectively; 2) The company achieved operating profit of 0.80/0.24/0.86/0.72/110 million yuan in 19/20/21/22/23Q1; 23Q1 operating profit increased 52.55% year-on-year, breaking 100 million yuan for the first time, reaching a record high. The changes on the profit side were mainly due to the simultaneous increase in the company's revenue and gross margin, the improvement in the company's business structure, and the improvement in revenue quality (government subsidies for non-recurring profit and loss projects were significantly lower than 22Q1).

Expense side: 1) Gross sales margins and net interest after deducting net interest were 22.53%/4.56%, respectively, up 1.04pct/1.12pct; 2) R&D expenses were 43 million yuan, up 21.81% year on year; 3) Sales expenses were 21 million yuan, up 34.38% year on year; 4) Financial expenses changed from positive to negative, up -141.48% year on year. Changes on the cost side are mainly due to the company's cost reduction and efficiency, increased investment in R&D, market development, and increased interest income from capital raised.

On the cash flow side: The net cash flow from the company's 19/20/21/22/23Q1 operating activities was -4.69/-5.00/-6.44/-930/-716 million yuan respectively. For the first time this year, the Q1 company reversed the trend of continuous deterioration in Q1 cash flow from previous years, and the cash flow situation improved.

We believe that the company has achieved remarkable results in reducing costs and increasing efficiency. Under the impact of the epidemic, demand for the company's main business declined, and at the same time, when combined with the increase in labor costs and the reduction in health workers, it was still possible to achieve a simultaneous increase in revenue/profit, while net profit after deducting non-net profit increased 42.70% year-on-year, reaching a record high. The first-quarter results greatly exceeded expectations, and the performance was impressive.

The engineering design/contracting business is under pressure, and the high-margin business is booming. In 23Q1, the company signed a new contract amount of 2,475 billion yuan, a decrease of 13.38% over the previous year. Among them, new engineering design/engineering contracting contracts were signed at 1,391/779 million yuan respectively, a year-on-year decrease of -14.82%/-22.82%, mainly due to the impact of the epidemic, which led to a decrease in demand for engineering design/contracting services and a decrease in health workers. As the epidemic improves, the new contract situation is expected to return to normal levels.

At the same time, new contracts were signed for engineering technology management services/engineering survey business of 247/138 million yuan, an increase of 18.65%/37.42% over the previous year. According to the 2022 annual report, the gross margin of the engineering technology management service/engineering survey business was 35.26%, which is the highest gross margin of the main business. The company's high-margin business is booming, and its profitability has been further enhanced.

Launched a digital technology innovation competition to cultivate employees' digital literacy. On February 17, the company held the “Employee Digital Technology Innovation Competition” in response to the work requirements of the Shanghai Municipal Committee and Municipal Government's “Opinions on Comprehensively Promoting the Digital Transformation of Shanghai's Cities” to stimulate the digital creativity of Group employees, create a digital innovation culture, and shape the digital ecosystem. The scope of topics includes: digital upgrades for business processes (software solutions/methodologies), intelligent applications for business data (algorithms/application reports), and new business scenarios centered on digital technology (new products/service solutions driven by data accumulation and digital technology). At present, the event has entered the voting stage for the finals. The entries include: integrated intelligent design and drawing software for staircase building structures, artificial intelligence generation technology to assist creative design of buildings, and methods to aid building styling using the artificial intelligence painting software Stable Diffusion.

The company's launch of a digital technology innovation competition is expected to cultivate employees' digital literacy and lay a solid foundation for further AI deployment. We continue to be optimistic that the company will benefit from the cost reduction and efficiency of “AI+ design” and the increase in industry concentration in the future.

Profit forecasting

The company's revenue for 2023-2025 is estimated to be 9802, 117.73, and 14.248 billion yuan respectively, and the EPS is 0.53, 0.62, and 0.72 yuan respectively. The current stock price corresponding to PE is 18.6, 15.7, and 13.6 times, respectively, maintaining the “buy” investment rating.

Risk warning

1) The company's artificial intelligence progress fell short of expectations; 2) the company's performance fell short of expectations; 3) macroeconomic development fell short of expectations.