Incidents:
On April 21, 2024, Sainz released its 2023 annual report and 2024 quarterly report: achieved operating income of 808 million yuan (yoy +47.47%), net profit of 90.33 million yuan (yoy +36.39%), net profit of 75.28 million yuan (yoy +35.02%); achieved operating income of 104 million yuan (yoy +2.57%) in the first quarter of 2024, net profit of 79.42 million yuan (yoy +492.69%), net profit from non-return to mother 15.51 million yuan (yoy +43.38%)
Investment highlights:
Comprehensive solutions, significant growth in overseas revenue, and stable profitability. (1) Solution revenue and product sales revenue increased dramatically: the company's comprehensive solutions/operation services/product sales (original pharmaceutical statistics, now included in integrated heavy metal wastewater treatment equipment products) accounted for 56.9%/23.9%/17.0%, respectively, compared with +12.27pct/-11.7pct/-0.69pct in 2022, the year-on-year changes in revenue were +88.03%/-0.96%/+41.69%, respectively. Among them, integrated solution order signing increased by more than 50% year-on-year, and operating revenue expanded Baiyin, New enterprise operating sites such as Fubon Copper have added two industrial park sewage treatment and operation projects; (2) Profitability remains stable: the company's comprehensive gross margin for 2023/2024/Q1 was 28.83%/40.13%, respectively, -1.87pct/+9.6pct compared to 2022/2023Q1, respectively. We expect the gross margin to be higher in the first quarter mainly due to the relatively high share of product revenue and operating revenue; looking at the revenue structure breakdown, the company's comprehensive solution in 2023 /Operation Services/Product sales gross margins were 22.71%/32.78%/45.3%, respectively, compared with 2022; (3) Significant increase in overseas revenue and high growth in overseas orders: Overseas revenue reached 8.06 million yuan in 2023, an increase of 428% year-on-year. The increase in overseas revenue was mainly due to the successful acceptance of Norton Phase I in Australia and the successful delivery of all equipment for the Kinkamoa Smelter Project in the Congo. The cumulative increase in overseas orders reached 51%, and the Mongolian market achieved a breakthrough , there are sufficient reserves for future overseas revenue orders.
2024Q1 achieved an investment income of 62.49 million yuan, mainly from the increase in investment income of 61.63 million yuan after completing the merger and acquisition of Fujian Zijin Pharmaceutical on February 4, 2024, when 39% of the original shares were re-measured according to fair value on the purchase date. The company completed the acquisition of the joint venture Fujian Zijin Mineral Processing Pharmaceutical Co., Ltd. in February 2024, and began merging into the consolidated statement in February 2024. The merger and acquisition increased goodwill by 165 million yuan. Zijin Pharmaceutical achieved net profit of 17.48 million yuan in 2023, an increase of 92% over 9.09 million yuan in 2022. According to the announcement of the acquisition of Zijin Pharmaceuticals disclosed on January 13, 2024 (unaudited data), Zijin Pharmaceuticals' high performance growth in 2023 was mainly due to the addition of new overseas Chinese customers. Zijin Pharmaceutical's top five new customers include Guangdong Zhanfei Trading (24 million yuan), Shanghai Xunxin Chemical (14.25 million yuan), Jiangxi Patton Environmental Protection (11.94 million yuan), and Ganzhou Tengyuan Cobalt (1.05 million yuan); while Zijin Mining Group contributed 25.32 million yuan in revenue in 2023, down from 26.15 million yuan in 2022, accounting for 22.9%.
The profit quality is good, but contract liabilities have declined, so we need to pay attention to the progress of obtaining plan orders.
(1) The turnover ratio of accounts receivable remained stable: accounts receivable and notes receivable at the end of 2023 were $437 million (yoy +64.82%), and the number of accounts receivable turnover days in 2023 was 150 days, the same as at the end of 2022. Among them, accounts receivable from related party Zijin Mining and related enterprises increased by 72.73 million yuan; (2) Good cash flow quality: the full year of 2023 generated operating cash flow of 67.32 million yuan (yoy +155.79%), and profit quality was good; cash equivalent at the end of the first quarter of 2024 (monetary equivalent) funds, (Transactional financial assets) Total of 40 billion yuan, a decrease of 188 million yuan compared with the end of 2023, which is mainly due to the impact of payment of Zijin Pharmaceuticals; (3) Contract liabilities declined: 2023/2024Q1 contract liabilities were 44.45 million yuan (yoy -37.18%) /63.14 million yuan (yoy -21.21%), and the book balance of the relevant party Zijin Mining contract liabilities at the end of 2023 was 8.11 million yuan, down 72% from 29.38 million yuan at the end of 2022; (4) The revenue of the related party Zijin Mining 281 million yuan, accounting for 34.82%, an increase of 98.78% over the previous year, accounting for an increase of 9 pct; Zijin Mining and its controlled company related party transactions are expected to be 450 million yuan in 2024. Zijin Mining's environmental expenditure in 2023 was 1.37 billion yuan, an increase of 42% compared to the 2021 expenditure of 964 million yuan (Zijin Mining did not disclose environmental expenditure data in 2022).
Profit forecast and investment rating: Considering the recent rise in upstream commodity prices, we expect that downstream metallurgical customers and mining customers, mainly heavy metal copper, lead and zinc, are expected to maintain a high level of prosperity. Sainz may benefit from this; as a heavy metal waste acid and wastewater treatment business platform under Zijin Group, the company will directly benefit from the increase in environmental capital expenditure of Zijin Mining. In this profit forecast, due to confirmation of current investment income, we raised our profit forecast for 2024, and the profit forecast for 2025 remains basically unchanged. We expect the 2024-2026 operating income to be 11.9/15.5/1.78 billion yuan and net profit to mother of 2.12/2.28/290 million yuan, a year-on-year growth rate of 135%/7%/27%, corresponding to PE 13.6/12.7/10 times. The company continued to maintain its competitive advantage, achieved high performance growth, and maintained a “buy” rating.
Risk warning: (1) Relaxation of environmental policies and regulations; (2) downturn in the macroeconomic environment; (3) slow repayment of accounts receivable; (4) the emergence of new technology paths to replace the company's technology path; (5) related transactions reduce the overall company's gross profit margin; (6) liquidity risk in the secondary market; (7) the risk of falling short of expectations and impairment of goodwill of the subject of the acquisition.