The company achieved significant year-on-year growth in revenue and performance in 2023Q2. On the one hand, it benefited from the accelerated conversion of orders into revenue last year, and on the other hand, it benefited from a relatively low base in Q2 last year. In terms of gross margin, the company used technical advantages such as the “high vacuum decryption method” to maintain the high gross profit level of the project, and overall orders also showed a considerable increase. Considering the gradual transformation of short-term company orders into revenue, medium- to long-term development entering the fast track, and high-quality operations, we maintained a “buy” rating and gave the company a target price of 31 yuan.

The conversion of orders into revenue accelerated in the first half of the year, and both Q2 revenue and performance increased significantly over the same period last year. In 2023H1, the company achieved revenue of 566 million yuan, a year-on-year increase of 38.00%, and net profit of 106 million yuan, a year-on-year decrease of 5.84%. By region, the company achieved domestic revenue of 213 million yuan and overseas revenue of 354 million yuan. The share of domestic and foreign revenue was comparable to that of the whole of last year. On a quarterly basis, the company's revenue for 2023Q2 was 364 million yuan, up 118.22% year on year and 80.29% month on month. Gimu's net profit was 78 million yuan, an increase of 939.14% over the previous year, and an increase of 171.88% over the previous period. As orders accumulated in the previous period were gradually implemented and construction began, the company achieved a marked increase in revenue and profit.

Q2 Profitability levels have increased markedly. The company's gross margin in 2023H1 reached 35.30%, down 0.97 pct from last year's overall level, while the gross margin for the second quarter reached 36.82%, an increase of 11.52 pcts over the previous year. We think it may mainly benefit from some projects with high profit levels being able to confirm revenue. The cost rate for the first half of the year (including R&D expenses) was 14.30%, down 1.29pcts from the previous year; the sales, management, finance and R&D expense ratio was 0.78%, 11.80%, -0.20%, and 1.93%; year-on-year changes -0.13pct, -3.00pcts, 2.13pcts, -0.29pct. Under the large increase in the company's revenue, expenses declined slightly, but overall the company still increased R&D investment. In addition, the company accelerated the flow of personnel and projects and reduced the effective management cost rate through refined management. Additionally Negative financial expenses mainly benefit from exchange rate changes resulting from increased exchange rate gains.

Short-term operating cash flow has declined due to the high upfront investment costs of some projects. The company's net operating cash flow in 2023H1 was 554.542 million yuan, a year-on-year decrease of 60.82%. The reason for the decline was mainly that the company undertook more projects, and some projects had higher upfront investment costs, but the company's main business, foundation processing, was at the front end of the project, accounted for a small proportion of total project investment (generally less than 5%), and the execution cycle was short, generally 3-12 months, and the project capital turnover was fast. The owners of the superimposed companies are mostly overseas multinational enterprises or local state-owned enterprises. The total assets and inventory of the company's 2023H1 contract reached 454 million yuan, an increase of 42.93% over the end of last year, indicating that related revenue is expected to be confirmed faster. In 2023H1, the company achieved a revenue ratio of 96.34%, a year-on-year decrease of 20.01 pcts, a year-on-year decrease of 78.04%, a year-on-year decrease of 6.85 pcts. The company is still expanding. We expect that as the project progress is gradually confirmed, cash flow is expected to improve at an accelerated pace.

Orders placed on a high base maintained high growth, and the company's development was on the fast track. The company signed new orders in 2023H1 reached 666 million yuan, an increase of 28.90% over the previous year, including 487 million yuan for the overseas market and 179 million yuan for the domestic market. The company maintained high growth despite a sharp increase in the number of new orders signed in 2022. In the short term, construction projects in Southeast Asian countries are progressing gradually. Looking forward to the future, as demand for foundation construction for different types of infrastructure and large-scale housing projects increases under future construction investment decisions in Southeast Asia and the Middle East, and Saudi Arabia and the UAE in the Middle East have recently been invited to join the BRICS cooperation mechanism. Future industry demand is booming, and the company is expected to continue to benefit and development is on the fast track.

Risk factors: Major projects fall short of expectations; risk of large exchange rate fluctuations; low price competition leading to a decline in gross margin; sharp rise in raw material prices; downstream demand falling short of expectations; risk of accounts receivable not being recovered.

Profit forecasting, valuation and rating: The company is deeply involved in overseas markets, especially in Southeast Asia, and its technology, standards, and brand have been highly recognized. In the short term, after the liberalization of epidemic control, demand for ground treatment in Southeast Asia, which is the company's main market, increased rapidly; in the medium to long term, the company formulated a “three-step” market development plan for Southeast Asia-Middle East, South Asia and Latin America-Africa, which is expected to continue to benefit from the demand volume brought about by Southeast Asia, the Middle East and other countries at different stages of development. According to the 2023 semi-annual report, the company's overall orders are positive, with new contracts signed reaching 666 million yuan. Also, considering the short overall construction period of the foundation treatment project and the high certainty of future revenue, we predict that the company's net profit for 2023-2025 will be 219/2.90/374 million yuan, respectively, and the corresponding PE at the current price will be 31.8/24.9/18.6 times. Looking at valuation levels: 1) Horizontally, the company's comparable companies mainly include Sinochem Geotechnical, Zhongyan Dadi, and Chengdi Xiangjiang. The average (ttm, excluding negative values) PE levels of comparable companies since 2021 have been 32.7, 30.6, and 16.6 times, respectively; 2) Vertically speaking, the company's average PE (ttm) since listing in 2021 has been 40.1 times. Considering that the company's performance has continued to improve in recent years, the overall business quality is superior to that of comparable enterprises (the company's gross margin in 2023H1 reached 35.3%, exceeding 8.79%, 16.10%, and 24.91% of the comparable company Sinochem Geotechnical, Zhongyan Dadi, and Chengdi Xiangjiang; in terms of repayment, unlike domestic enterprises, the company's main revenue comes from overseas business. According to the company announcement, the payment terms for some overseas projects are 100% paid every month, but the domestic payment terms are “paid to the project settlement price within one month after completion and acceptance of the project. “After one year, we think we can give the company 35 times PE valuation in 2024, corresponding to a market value of 10.2 billion yuan. Also, considering that the average PB since the company was listed is about 3 times, we think we can give the company 3 times PB in 2024, corresponding to a market value of 6.1 billion yuan. Comprehensive PE and PB valuation, we believe that the company's reasonable market value is around 9 billion yuan, corresponding target price of 31 yuan, and maintains a “buy” rating.