1Q24 results are in line with our expectations
The company announced 1Q24 results: revenue -5% YoY to $7.15 billion, net profit to mother -10% YoY to $348 million, deducted non-net profit -4% YoY to $310 million, which is basically in line with our and market expectations.
1) Active contraction of real estate business, revenue pressure: As industry demand is still under high pressure (1Q real estate construction area -28% YoY, real estate investment -10% YoY), the company's 1Q24 revenue slowed to -5% (1Q23 +19% YoY, which is basically the same growth rate as 4Q23), which we believe is mainly due to the company's contraction of real estate collection business. 2) Raw materials declined year on year, and comprehensive gross margin rebounded slightly: the average price of 1Q24 asphalt fell slightly by 2-3% year on year compared to the same period last year, and emulsion etc. also declined, driving the company's gross profit margin (before taxes and surcharges) to +1ppt to 29.7% year on year (+6.7ppt) year on year. 3) The cost ratio for the period was stable year-on-year: The company's expense ratio for the 1Q24 period increased slightly by 1.1 ppt to 20.4% year on year, with sales/management/R&D expense ratios respectively +0.5/+0.3/+0.3 ppt, respectively. This was mainly due to the reduction in the scale and dilution of revenue when sales management expenses remained stable. The overall operating profit margin was -0.1 ppt to 6.9% year on year, and the net interest rate was -0.3 to 4.9% year on year. 4) Revenue remained high, and accounts receivable increased, resulting in net cash outflow: 1Q24's revenue ratio was -6.8ppt to 103% year over year, but net operating cash flow was +1.92 billion yuan to -1.8 billion yuan year on year (compared with the same period last year, payment of other cash related to operating activities decreased by 2.14 billion yuan year on year (mainly a decrease in margin expenses), of which receivables were +1.24 billion yuan month-on-month (corresponding accounts receivable turnover -8 to 128 days year on year), inventory was -330 million yuan month-on-month, and other accounts receivable were +2.8 billion yuan month-on-month, Accounts payable were -530 million yuan month-on-month, and contract liabilities were -749 million yuan month-on-month. 5) Interest-bearing debt declined, and the balance ratio was still sufficient: 1Q24's interest-bearing debt was 1.47 billion yuan to 5.54 billion yuan (of which cash in hand was about 5.19 billion yuan), and the balance ratio was -3.6ppt to 40.3% month-on-month, which is in a good state.
Development trends
The rapid adjustment of the business structure, with retail and engineering channels as the core, is expected to support stable valuations. We believe that the company is rapidly reducing its real estate collection business. Through a two-pronged approach between engineering channels and the retail sector, it is expected to achieve steady and high-quality development and ensure a steady rise in the company's cash flow and profit margin. Looking forward to the future, we are optimistic that the company's quarterly cash flow will gradually improve by reducing the scale of collection, prioritizing partners, expanding engineering channels, and increasing channel node repayment amounts; at the same time, the company accelerates the development of the retail sector and obtains high-quality profits and cash flow, driving the company's overall revenue steady upward, cash flow improvement, and upward operating quality. The current valuation has some support.
Profit forecasting and valuation
We kept our net profit unchanged for 24/25, and the current stock price corresponds to 24/25 12/10x P/E. We maintain our outperforming industry rating and target price, corresponding to 2024/25E 16x/13x P/E, implying 39% upside.
risks
Demand recovery fell short of expectations, depreciation exceeded expectations, and retail sector growth declined