Incident: The company released its 2023 annual report. The realized revenue/net profit attributable to mothers/net profit after deducting non-return to mother in '23 was 15.1/1.6/130 million yuan, respectively, -17.5%/+43.8%/+48.1% compared with the same period last year. 23Q4 achieved revenue/net profit attributable to mothers/net profit after deduction of non-net profit of 4.5/0.2 billion yuan, respectively, -14.4%/+170.1%/+183.9% year-on-year.

The company plans to distribute cash dividends of 0.8 yuan/share (tax included), with a dividend rate of 97% (dividend rate +45 pcts year over year), and a dividend rate of about 5.7%.

The strong growth in prefabricated orders drastically reduced the EPC business to optimize the revenue structure. In '23, the company signed a new contract of 1.55 billion yuan, an increase of 2.5%. Of these, new prefabricated design contracts were signed at 800 million yuan, an increase of 42.9%, accounting for an increase of 16 pcts to 56.5%. In '23, the company's architectural design/cost consulting/general engineering achieved operating income of 11.2/1.9/160 million yuan, -9.1%/-14.5%/-49.6% year-on-year, and gross margins of 35.1%/42.2%/0.96%, respectively, +0.5/+3.8/-2.2pcts year-on-year. Under the contraction of orders in '22 and the slow macroeconomic recovery in '23, the company's revenue continued to decline year over year, but the decline was 19 pcts narrower than the same period last year. The general engineering contracting business was further compressed, and its share fell to 11%. The company's public construction design sector bucked the trend and achieved revenue of 420 million yuan in '23, +7.1% year-on-year, and gross margin of 38.8%.

Profitability has improved, and results have been remarkable in reducing costs and increasing efficiency. The company's gross and net sales margin in '23 was 32.2%/12.6%, an increase of 3.0/4.6pct. The cost rate decreased by 0.5pct to 15.5% over the 23-year period, and the sales/management/ financial/ R&D expense ratio was 2.7%/8.0%/0.3%/4.5%, +0.2/-0.9/+0.01/+0.1pct. Streamlining management personnel and controlling labor costs have reduced the company's management expense ratio. The company's cash flow also improved. Net operating cash flow in '23 was $290 million, an increase of $0.2 billion over the same period last year.

Deepening AI applications are expected to improve business performance, and a warming low-altitude economy is expected to bring incremental orders. The company continues to upgrade and optimize the BIM forward design platform - Huayang Express Construction. At the same time, it is also accelerating the integration of AI technology and the entire design process based on digital transformation. With the continuous advancement of the “three major projects”, there is strong demand for urban village renovation in Shenzhen. As a regional design leader and equipped with technology throughout the prefabricated construction process, the company is expected to fully benefit. At the same time, the company is involved in aviation town planning and design. Currently, projects such as planning and design around South Lake in Gongqingcheng, Jiangxi and Taiping Bay in Liaoning all involve the low-altitude economy, and it is expected to bring in more orders as the low-altitude economy continues to heat up.

Profit forecast, valuation and rating: Considering that the company's 23-year performance growth rate fell short of expectations, we lowered our 24-25 net profit forecast to 200/230 million yuan (21.1%/27.1%, respectively), and the net profit forecast for 26 years was 250 million yuan. We are optimistic that the company's profitability will continue to increase under the deepening application of AI. The promotion of the “three major projects” and low-altitude economic development are also expected to bring more incremental orders and maintain the company's “buy” rating.

Risk warning: Downstream residents' recovery in the construction industry falls short of expectations, and the introduction of cutting-edge AI technology falls short of expectations.