Private design leaders have strong operating resilience and optimized business structures to improve profits. Against the backdrop of pressure on the real estate industry, the overall revenue and performance of the architectural design sector declined. The company's net profit declined sharply year-on-year in 2021 due to the surge in low-margin EPC business and bad debt calculation. Starting in 2022, the company adjusted its business structure, shrank EPC and inefficient business volume, and rapidly restored profitability. In 2022, gross margin increased 8.32 pct to 29.21%, net profit margin increased by +3.38 pct to 7.92% year on year, and continued the trend of increasing profitability in 2023. The net profit margins for 2023H1 and 2023.3Q were 7.92% (+3.38 pct year on year) and 14.28% (+2.37 pcts year on year), respectively.

2022, 2023H1, and 2023.3Q achieved net profit of 1.12, 0.70, and 139 million yuan, yoy +6.48%, +4.42%, and -3.64%. The performance growth rate is at the top of the sector, and the overall management is resilient.

Dig deeper into the non-housing public construction business sector, with outstanding advantages in the fields of urban renewal and guaranteed housing. The company is actively developing business in the non-housing sector, expanding from housing enterprises and housing to public construction and commercial complexes. The share of public construction business revenue increased from 24.31% in 2019 to 34.41% in 2023H1, effectively hedging the pressure on the real estate industry. 2023H1 architectural design signed a new contract amount of 939 million yuan, +19.85% over the same period last year.

The company has been deeply involved in the field of urban renewal and renovation for 16 years. It has the ability to undertake design consulting services at the 1/2 development stage. It has participated in many iconic projects in the Guangzhou-Shenzhen region, and has outstanding advantages in project resources and operation experience. In addition, the company is a leader in the field of guaranteed housing in Shenzhen. It has participated in the formulation of local standards for a long time. It is one of the first design enterprises in the country to complete the development of city-level guaranteed housing products. The construction area of guaranteed housing exceeds 5 million square meters, and its project resources and technical strength have built competitiveness.

Urban village renovation+guaranteed housing are actively setting the tone, creating an increase in demand for front-end design consulting. This year, the overall pace of urban village renovation in megacities was positive. According to our estimates under the 20%-50% demolition ratio scenario, the total investment scale for urban village renovation in the 21 megacities was 3.5-8.2 trillion yuan, the total investment in construction and security was 1.8-4.0 trillion yuan, and the median annual construction and security investment was 414.4 billion yuan/year. The design consulting company is at the forefront of the urban village renovation industry chain, and both level 1 and 2 development are in demand. We estimate that the current round of urban village renovation design demand is 524-122.5 billion yuan, of which the Guangzhou-Shenzhen region accounts for about 23%. Guaranteed housing is one of the key construction sectors in China during the “14th Five-Year Plan” period. In August of this year, the National Standing Committee deliberated and passed the “Guiding Opinions on Planning and Construction of Affordable Housing” (Document No. 14), which proposed promoting affordable housing construction as an important measure to promote the establishment of a new model for the development of the real estate industry. In the future, China will take many measures to expand the supply of affordable housing. In the future, China will take many measures to expand the supply of affordable housing, and strong construction demand will drive an increase in the size of the design market.

Profit prediction is based on investment advice: The company is a high-quality private leader in the field of architectural design, with excellent qualifications and strong technical strength. During the downturn in the real estate industry, the customer structure was adjusted flexibly, and the share of non-housing business increased. At the same time, the EPC business scale was reduced, design orders maintained rapid growth, profitability increased, and was more resilient than its peers. The company has outstanding customer resources and technical experience advantages in the field of urban renewal and guaranteed housing construction, and is expected to benefit fully from this round of urban village renovation and guaranteed housing construction. In addition, the company has industry-leading levels of prefabricated design and BIM applications. It is committed to building technology research and development, promoting BIM and AI design and development applications internally, and cooperating with software companies to develop BIM software, and accelerate technological transformation based on traditional design business, which is expected to create new performance growth points and help improve valuations. We are optimistic about the company's steady future development. The company's revenue for 2023-2025 is expected to be 1,939 billion yuan, 2,282 million yuan and 26.68 yuan, respectively, up 6.21%, 17.69% and 16.93% year on year; net profit is 1.73, 2.06 and 242 million yuan, respectively, up 53.93%, 19.16% and 17.61% year on year, respectively. Maintain the “buy-A” rating and give it 20 times PE in 2023, corresponding to the target price of 17.6 yuan.

Risk warning: The risk of a sharp decline in investment in real estate and infrastructure development: Ongoing orders are not progressing as expected Risk: Urban village renovation and guaranteed housing construction are progressing less than expected; project repayment falls short of expectations; risk of increased competition in the industry.