Description of the event
The company released its 2023 annual report: achieved revenue of 32.8 billion yuan, a year-on-year increase of 5%, net profit of 2.27 billion yuan, an increase of 7% year-on-year, and a 2% year-on-year increase after deducting non-net profit. The company released its 2024/1 quarterly report: achieved revenue of about 7.1 billion yuan, a year-on-year decrease of 5%, attributed net profit of about 350 million yuan, a year-on-year decrease of 10%, and a year-on-year decrease of 4% after deducting non-net profit.
Incident comments
The channel structure has been optimized, and the drive for revenue growth has changed. The company's revenue in 2023 increased 5% year on year. The four quarters revenue growth rates were 19%, 4%, 5%, and -5%, respectively. Demand in the construction industry weakened marginally throughout the year. 2024Q1 In a situation where construction started and completion were weak and last year's base was high, the company's revenue fell 5% year on year. In terms of categories, in 2023, the company's revenue from waterproof membranes, coatings, and mortar powder increased 7%, 14%, and 40% year-on-year, while engineering construction declined 26% year on year. The company took the initiative to shrink the engineering construction business, and the sharp increase in new types of mortar powder offset the decline in construction. The company's channel structure has improved markedly. Retail channels, engineering channels, and direct sales business accounted for 28%, 38%, and 32% of revenue respectively, and 23%, 33%, and 41% of revenue for the same period last year, respectively. Direct sales revenue fell 20% year-on-year, mainly due to the contraction of real estate companies' business. Direct sales revenue accounted for more than 60% in 2015-2020, and now it has rapidly declined to about 30%, reflecting the company's ability to execute channel changes. Engineering channel revenue increased 23% year-on-year, mainly due to the increase in the share of integrated companies in the regional market. The company made every effort to develop partners, upgrade channel policies, enable channel development, and continue to sink channels. Retail channel revenue in 2023 was about 9.3 billion yuan, up 28% year on year. Among them, Civil Construction Group's revenue was 8.2 billion yuan, up 35% year on year, and the network layout and service capabilities continued to be refined. Currently, the number of distributors of the company Civil Construction Group at the end of the year was nearly 5,000, with more than 220,000 distribution outlets, a significant increase over 2022 (the number of dealers in 2022 has exceeded 4,000 and more than 160,000 distribution outlets).
Gross margin improved, and depreciation dragged down performance. The gross margin for the full year of 2023 was about 27.7%, up 1.9 pct year on year. On the one hand, the price of raw asphalt fell (see Longzhong News, the average price of asphalt in the national asphalt market in 2023 was about 3,970 yuan, down 5.5% year on year), and on the other hand, the share of high-margin retail businesses increased (gross margins of retail, engineering, and direct sales were 39%, 24%, and 14%, respectively). Looking at a single quarter, the company's gross margins were 28.7%, 29.1%, 29.4%, and 23.0%, respectively. The pressure on gross margin in the fourth quarter was mainly due to low capacity utilization and centralized construction settlement at the end of the year. During 2023, the cost rate was about 16.0%, a year-on-year decrease of about 0.8 pct, and remained relatively stable. Focusing on 2024Q1, the company's gross margin rebounded to 29.7%, up 1.0 percentage point year on year, mainly due to the optimization of the company's channel structure. However, during the first quarter, the rate rate was about 20.4%, up 1.1 percentage points year on year. In the end, the company's net profit margin for the first quarter was about 4.9%, a slight decrease of 0.3 percentage points.
Risk is further unleashed. The company's 2021-2023 revenue ratio was 1.11, 1.05, and 1.02. The pay-to-cash ratio gradually improved, and the final net cash ratio was 0.98, 0.31, and 0.93. Accounts receivable and notes at the end of the period were $10.2 billion, a year-on-year decrease of $1.2 billion. As the number of accounts receivable days increased, the company accrued credit impairment losses of about $750 million for the whole year ($310 million in the same period last year).
In response to the remaining risk exposure, the company mortgaged real estate, which existed in the form of non-current assets after transfer. Due to falling housing prices, the company depreciated the assets by about 200 million yuan. Net cash flow from operating activities in the first quarter was -18.9 billion yuan, compared to -3.81 billion yuan in the same period last year, mainly due to the fact that performance guarantees were no longer generated this year. The products of this era are a thing of the past.
Channels have been optimized and risks are shrinking. The company's net profit is expected to be 3.38 billion yuan in 2024-2025, and the corresponding valuation is 10 to 9 times. Focus on the arrival of an inflection point in its operating quality.
Risk warning
1. The recovery of the real estate industry falls short of expectations;
2. The price of raw materials continues to rise.