Comment:
The advantages of state-owned assets in empowering them have gradually become apparent, and the quality of operations has been steadily improving. Since investing in the holding in August 2020, Huafa Group has promoted the company to improve the quality of operations through asset injection, business collaboration, and credit enhancement, etc., and the adverse effects accumulated in the previous period are gradually dispelling. (1) Consolidated gross margin rebounded steadily: In the third quarter of 2023, the company achieved operating income of 4.07 billion yuan, corresponding to a comprehensive gross profit ratio of 4.6%, an increase of 0.6 pct over the previous year. This is the first time in the past three years that gross margin has rebounded year-on-year in a single quarter. (2) Asset quality has improved: In the third quarter of 2023, the company estimated impairment losses of 24 million yuan, a year-on-year decrease of 11 million yuan. This is the first time in the past three years that impairment losses have decreased year-on-year. As of the end of the second quarter of 2023, the book value of accounts receivable prepared by the company on a single basis for bad debts was only $17 million, and the accrual ratio reached 87.0%. Bad debt calculation was already sufficient; the share of accounts receivable from Huafa Group and related parties increased to 71.3%, and the margin of safety for subsequent performance was high.
Positioning as the only platform for Huafa's construction sector, the industrial chain layout continues to improve. In 2023, the company successively acquired 50% of Jinglong Culture's shares and Jiantai Construction's 39% shares, achieving wholly-owned holding of its two major operating assets; later, it acquired 100% of Huafa Garden's shares and sold 66% of Mindong Construction Engineering's shares, optimizing the asset structure and improving the industrial chain layout. As an important force in the field of real estate development and urban operation in Zhuhai, Huafa Group has huge construction engineering market resources; the company is positioned as the only platform for the construction sector under Huafa Group, and is expected to achieve continuous growth in the engineering and decoration industries and complement and improve the industrial chain, fully benefiting from the vast space brought by urban development in the Greater Bay Area.
Entering the photovoltaic construction market, the cultivation of new businesses is beginning to bear fruit. In response to the national “double carbon” strategy and the “PV capital” industrial plan of Zhuhai, Huafa Group has successively laid out the PV industry chain links such as silicon materials, silicon rods, silicon wafers, equipment, and batteries. The company has regional, brand, and resource advantages in constructing major construction projects, and has the ability to undertake photovoltaic construction projects. It is expected to become an important part of the photovoltaic industry chain in Zhuhai. Since 2023, the company has actively laid out a photovoltaic construction track and focused on building a new growth pole. It has successively won bids for photovoltaic projects such as distributed photovoltaic power generation in Zhuhai, Huaguan Technology's 1.8 MWp distributed photovoltaic power generation in the High-tech Zone of Zhuhai, and the first batch of 5.0 new industrial space. The winning bid amount exceeds 1.7 billion yuan, and the cultivation of new businesses has begun to bear fruit.
Maintain the “Overweight” rating. The company's main engineering and decoration business is growing steadily, and the adverse effects accumulated in the previous period are gradually being resolved, and performance is expected to continue to improve; the cultivation of the photovoltaic construction business is beginning to bear fruit, and growth is also expected to show. It is estimated that the company's EPS from 2023 to 2025 will reach 0.18/0.25/0.37 yuan, and the corresponding PE will be 65.13/45.31/31.20 times, maintaining the “increase in holdings” rating.
Risk warning: PV construction business development falls short of expectations, performance falls short of expectations, project repayment risk