Matters:
Dongfang Yuhong released its 2023 annual report: The company achieved operating income of 32.823 billion yuan in 2023, +5.15% year over year, and net profit to mother of 2,273 billion yuan, +7.16% year over year.
Commentary:
Retail sales and sand powder maintained high growth, and impairment losses affected performance: the company's operating income in 2023 was 32.823 billion yuan, +5.15% year over year, and net profit to mother was 2,273 billion yuan, +7.16% year over year. On a quarterly basis, 2023Q1-Q4 revenue growth rates were +19%, +4%, +5%, and -5%, respectively, while performance growth rates were +22%, +46%, +48%, and -117%, respectively.
Q4 Business performance has clearly weakened. We believe that the revenue side is mainly affected by the decline in industry sentiment. The profit side may be affected by multiple factors such as changes in product structure (engineering business settles more at the end of the year), pressure on B-side product prices, and impairment accruals. By business, waterproof materials achieved revenue of 23 billion yuan, +9.6% year over year, and gross margin increased by 3 pcts year on year. We believe that mainly due to channel optimization, revenue from mortar powder increased 40%, gross margin increased 4.7 pct year on year, and revenue from engineering and other businesses all showed a double-digit decline. By channel, retail channel revenue increased by 28%, accounting for 28%, gross margin of nearly 40%, engineering channel accounting for 24%, direct sales business accounting for 32%, gross profit margin of 14%, profit gap between channels is large. The industry is still bottoming out. The company has withstood the pressure of some traditional businesses through optimization of its own channels and product structure, so the gross margin of reporting has been repaired, but if we compare listed companies in the same industry, the gross margin of the waterproof business is currently around 20%, and the profit pressure on small enterprises may be even greater.
The operating profit level was significantly restored, and the cash content and dividend ratio increased markedly: the company's gross margin in 2023 was 27.69%, +1.92pct compared to the previous year. The rate for the period was 16%, -0.83 pct year on year, of which management rate, R&D rate, sales rate, and finance rate were -1.06 pct, +0.06 pct, +0.56 pct, and -0.39 pct, respectively. Net profit margin 6.97%, +0.18pct year over year. Asset and credit impairment losses were $1,039 million, an increase of $646 million over the previous year. If impairment losses of 600 to 1 billion dollars were added, the corresponding operating net interest rate was about 8.7% to 10%, and the bottom of the cycle still maintained strong profit resilience. By the end of the period, the company's accounts receivable and contract asset balances totaled 13.946 billion yuan, with a total bad debt/impairment reserve balance of $2,047 billion. Under channel optimization, cash flow improved significantly. The company's net operating cash flow in 2023 was 2.03 billion yuan, +1,449 billion yuan year on year. Accounts receivable and notes receivable were $10.185 billion, year-over-year — $1.2 billion. The cash dividend ratio has increased dramatically. The planned cash dividend is 1.47 billion yuan, accounting for a sharp increase of 65% of net profit, and the dividend ratio exceeds 4%.
Channel decline and multi-category expansion create long-term growth drivers. 1) Strengthen market coverage by focusing on the local market and territorial management; 2) Adhere to the C-side priority strategy: the Civil Construction Group focuses on laying out tile paving and sewing product lines, continuously cultivating wall auxiliary product lines such as reinforcing agents and putty powder, promoting the development of rubber products, incubating new categories such as hardware and pipe industry, and opening up the growth ceiling in multiple categories; 3) The B-side has achieved good results, and the sand powder business has created a new growth point.
Profit forecast and investment suggestions: Considering that new real estate construction has not improved significantly, and land production prices are declining, we adjusted the company's 2024-2026 EPS forecast to 1.16, 1.50, and 1.85 yuan/share (the original value for 24-25 was 1.78 yuan and 2.29 yuan/share), corresponding to PE 12x/9x/7x, respectively. According to the historical valuation method, considering that there is still some uncertainty in the industry, we are careful to give 15x PE in 2024, with a target price of 17.4 yuan/share, maintaining a “strong” rating.
Risk warning: The area of new real estate construction has declined sharply, and the price of raw materials has fluctuated sharply.