2023 results fall short of our expectations

The company announced 2023 results: 2023 revenue of 633.87 billion yuan, +6.95% year on year, net profit to mother of 8.67 billion yuan, -15.6% year on year; of these, 4Q23 revenue was 166.55 billion yuan, -14.9% year on year, and net profit to mother was 487 million yuan, -86.3% year on year. The company's 2023 performance fell short of our expectations, mainly because the 4Q23 impairment accrual exceeded our expectations.

The engineering contracting business grew steadily, and gross margin increased. In 2023, the company's engineering contracting business revenue was 585.48 billion yuan, +9.3% year-on-year, gross profit margin 9.1%, and +0.25ppt year-on-year. The engineering contracting business maintained a good growth momentum and efficiency improvement trend. The resource development business and real estate business are under pressure.

In 2023, the company's resource development business revenue was 6.816 billion yuan, -23% year-on-year, 30.99%, year-on-year -5.36ppt; comprehensive real estate business revenue was 16.519 billion yuan, -27% year-on-year, gross profit margin 7.89%, year-on-year -3.11ppt. Operating cash flow was under pressure for the full year, but 4Q23 cash flow improved markedly year over year. The company's net operating cash flow in 2023 was 5.892 billion yuan, -67.5% year-on-year, but the net operating cash flow for the 4Q23 quarter was 28.37 billion yuan, +8.65 billion yuan year-on-year. Accruing large depreciations drag down profits. The company calculated asset impairment losses of 1,392 billion yuan and credit impairment losses of 3,543 billion yuan in 4Q23, which greatly hampered the performance of the whole year.

Development trends

Project revenue and orders are growing steadily, and the core business growth is resilient. In 2023, the company's engineering contracting business revenue was +9.3% year-on-year, and the amount of new contracts signed was about 1.42 trillion yuan, up 6.0% year on year. At the same time, the amount of new overseas contracts signed was 63.384 billion yuan, an increase of 43.72% year on year, a record high. We believe that the company's core business is still expected to maintain steady growth.

The resource development sector is under pressure, focusing on potential profit elasticity. The revenue of the resource development sector in 2023 was -23.1% year-on-year, and net profit was -5.6% year-on-year, mainly due to a significant drop in the prices of minerals such as nickel, zinc, and cobalt from their high levels in 2021-2022. The output of each project increased and decreased. The nickel/cobalt production of the Ruimu project in Pakistan was -2.03%/+2.85%, the crude copper production of the Shandak project in Pakistan was +4.26%, and the production of zinc/lead in the Duda project was -2.49%/-11.79% year-on-year. We recommend focusing on the subsequent recovery of mineral prices, as well as the potential price and profit elasticity of the Shandak copper and gold mine project, which benefits from rising copper prices and expansion of mining and production.

Profit forecasting and valuation

Considering downstream demand or pressure, we lowered the company's 2024/25E net profit of 34.4%/34.4% to 92.53/10.294 billion yuan. The current stock price corresponds to 2024/25E7.5x/6.8x P/E for A shares and 2024/25E 3.3x2.9x P/E for H shares 2024/25E. Considering that the company's P/B valuation is currently at a historically low level, we maintain the company's A/H share outperform industry rating, maintaining a target price of 4.6 yuan, corresponding to 2024/25E 10.3x/9.2x P/E, implying 36.9% upward space; maintaining a target price of HK$2.13 for H shares, corresponding to 2024/25E 4.2x/3.7x P/E, implying 27.5% upward space.

risks

The price of resource products fell, and the project fell short of expectations.