Core views:

Revenue remained steady in '23, and the decline in profit was affected by factors such as depreciation and rising US dollar interest rates. Revenue of 23 billion yuan, +0.3% year over year, profit before tax of 2,664 billion yuan, -16.49% year on year, net profit to mother was 2,368 billion yuan, -6.1% year on year. The decline was affected by factors such as increased impairment preparations for receivables and rising interest rates on US dollar loans. We expect the drag of these two items will gradually decrease in the future, and net interest rates will gradually return to the historical central level (11-12%), which will bring about greater profit elasticity.

The scale of domestic plastic pipelines is gradually stabilizing, and joint plastics is consolidating its leading position, increasing its market share at an accelerated pace. In the future, it will actively expand the domestic non-housing sector and seize overseas opportunities. According to the China Plastics Association, China's plastic pipeline industry produced 16.19 million tons in '23, and the market size exceeded 180 billion yuan. The concentration was still low but continued to increase, CR3 was about 22% in '23 and 13%/15% in 12/15; China Liansu led the industry, and its market share increased rapidly during the downward phase of demand, reaching 16.3% in '23. The cost advantage was the core competitiveness, and scale effect+supply chain efficiency established a barrier on the production side. Relying on long-established channel advantages and brand advantages, it continued to maintain a high capacity utilization rate and widen the gap with other competitors; In recent years, the share of demand in non-housing sectors such as municipal administration, infrastructure, agriculture, and industry has increased rapidly, and the pace of overseas expansion in Southeast Asia, the United States, Africa and other regions has progressed steadily.

Diversified sales of building materials and home furnishings are developing steadily. In the future, businesses such as supply chain platforms and new energy will be treated carefully, and the strategic focus will return to the main pipeline industry.

The quality of operations is maintained at a high level. The balance ratio continued to decline in '23, cash on hand was abundant, and operating capacity was strengthened. Judging from history, Liansu's cash flow has been steady for a long time, and capital expenditure will be drastically reduced after the strategic focus is adjusted. After short-term operating pressure is absorbed, it is expected that shareholder returns will continue to increase.

Profit forecasting and investment advice. We estimate that the company's net profit for 24-25 years will be 2.8-3.3 billion yuan. The current market value corresponds to PE 3.19 and 2.71 times, giving the company 5 times PE in 24 years, corresponding to a reasonable value of HK$4.89 per share, covering the first time to give it a “buy” rating.

Risk warning. The demand impact brought about by the decline in real estate exceeded expectations, the domestic non-housing sector and overseas market expansion fell short of expectations, and fluctuations in raw material prices exceeded expectations.