1Q24 revenue and net profit fell short of our expectations
The company announced 1Q24 results: total revenue decreased 1.1% year on year to 1,286 billion yuan, net profit to mother decreased 94.9% year on year, net profit not attributable to mother - 1.39 million yuan, year-on-year change from profit to loss (94 million yuan in the same period last year). 1Q24 revenue and net profit fell short of our expectations, mainly due to the fact that new orders had not recovered significantly, and management expenses increased more than expected due to compensation for terminators.
Development trends
Revenue structure improved. We expect 1Q revenue structure: 1) There will be a certain decline in the construction business: the 1Q construction business increased 43% year on year and the cost business increased 12% year on year. We believe that the 1Q construction business base was high last year; 2) The cost business performance was basically stable: 1Q24 contract liabilities were 2,137 billion yuan, -6.0% year over year. New orders for the cost business have not recovered significantly, but the promotion of the clearance business may have contributed to the signing of new orders.
The cost control effect was evident, but management expenses increased markedly in the first quarter due to separation compensation. 1Q24 The company's operating costs were -8.3% year-on-year, and the company's gross margin increased by 0.9ppt to 87.1% year over year, mainly due to improvements in the company's revenue structure and cost control. 1Q24 sales expenses, management expenses, and R&D expenses were -6.3%/+47.6%/-10.2%, respectively. The increase in management expenses was mainly due to the optimization of the company's organizational structure and compensation for retirees. Management expenses increased by 135 million yuan over the same period last year, but we believe that the year-on-year decline in the number of employees will lead to some savings in management expenses, and it is estimated that the cost of layoffs is between 1.5 billion yuan and 200 million yuan.
External environmental pressure still exists. It is recommended to pay attention to new orders. The revenue structure is expected to improve throughout the year. From January to January 2024, the area of new housing construction decreased by 27.8%, and the completed area of housing decreased by 20.7%. The company's revenue is basically stable, but external environmental pressure still exists. It is recommended to pay attention to marginal changes in the real estate sector and the repair of new orders signed by the company. Looking ahead to the whole year, in terms of cost business, we believe that growth products such as the company's clean-up products are expected to develop rapidly and contribute to revenue growth; in terms of construction business, the company said it will continue to optimize the product structure to develop products with advantages and high potential, and we believe that the revenue structure is expected to improve.
Profit forecasting and valuation
Considering that external environmental pressure exceeded expectations, we lowered our 2024/25 revenue forecast by 3.4%/3.7% to 6.77 billion yuan/7.23 billion yuan; considering expenses arising from 24E employee termination compensation and improvements in the company's revenue structure, we lowered our 2024/25 net profit 17.8%/1.9% to 560 million yuan/890 million yuan. The current stock price corresponds to the 2024/25 price-earnings ratio of 30.8 times/19.3 times. Maintaining an outperforming industry rating, considering that the market still has concerns about external environmental pressure and fluctuations in downstream demand, we lowered our target price by 15.0% to 17.0 yuan corresponding to the 2024/25 price-earnings ratio of 50.6 times/31.8 times. There is 64.4% upside compared to the current stock price.
risks
The impact of fluctuations in downstream demand exceeded expectations; the company's repair of new orders fell short of expectations.