Incidents:
On April 18, 2024, Dongfang Yuhong released its 2023 annual report: the company achieved annual revenue of 32.823 billion yuan, an increase of 5.15% over the previous year; realized net profit attributable to shareholders of listed companies of 2,273 billion yuan, an increase of 7.16% over the previous year.
Opinions:
The waterproof industry was under pressure in 2023, and the company's retail revenue bucked the trend and grew rapidly. In 2023, under the influence of factors such as the high price of asphalt, the main raw material, and weak downstream demand, China's waterproofing industry as a whole was under pressure. In this context, the company continues to expand the field of civilian building materials, vigorously develop retail business, and revenue is growing rapidly against the trend. In 2023, the company's retail business achieved revenue of 9.287 billion yuan, an increase of 28.11% over the previous year, accounting for 28.29% of the company's revenue. The share of retail business gradually increased. Judging from the gross margin, the gross margin of the company's retail channel in 2023 was 39.42%, an increase of 4.63 percentage points over the previous year. By the end of 2023, the Civil Construction Group had nearly 5,000 dealers and over 220,000 distribution outlets. Civil Construction Group achieved annual revenue of 8.18 billion yuan, an increase of 34.58% over the previous year. The company's engineering channel and direct sales business achieved revenue of 125.10 billion yuan and 10.368 billion yuan respectively, of which the engineering channel increased 22.58% year on year. Affected by the real estate market, the direct sales business fell 19.63% year on year. The increase in the share of retail and engineering channel business revenue is expected to lead to an improvement in the company's profit quality.
Emerging businesses are developing rapidly, and revenue from the mortar powder business has increased dramatically. In 2023, the company's business segments, represented by Sand Powder Technology and Hongsheng New Energy, have been working hard and gaining momentum.
In particular, in the mortar powder business, the company achieved annual revenue of 4.196 billion yuan, a year-on-year increase of 40%, and a gross profit margin of 27.56%, an increase of 4.67 percentage points over the previous year.
Global layout and active expansion of overseas business. As the globalization strategy continues to be deepened and advanced, the company is further actively deploying around international exchanges and cooperation and overseas project construction such as the “Belt and Road” with overseas intellectual property rights, and continues to promote high-quality products and high-standard services to overseas markets. At present, the company has set up overseas companies or offices in Vietnam, Malaysia, Singapore, Indonesia, Canada, the United States and other countries, laying a good foundation for consolidating overseas business development and expanding overseas market space.
Cash flow improved drastically, and accrued impairment dragged down performance. The company's net cash flow from operating activities during the reporting period in 2023 was $2.03 billion, an increase of 221.58% over the previous year, mainly due to an increase in cash received from sales of goods and provision of services, and a decrease in cash from purchasing goods and receiving labor payments. In 2023, the total amount of asset impairment reserves calculated by the company was RMB 1,039 million, which dragged down performance, of which credit impairment losses amounted to RMB 753 million.
Profit forecast and investment rating: The company's retail business performed well. Revenue bucked the trend and grew rapidly, driving an increase in gross margin. At the same time, the company's mortar powder business revenue increased dramatically, which is expected to become another growth point for the company's future performance. We expect the company to achieve net profit of 2,908 billion yuan, 3.267 billion yuan, and 3.655 billion yuan respectively in 2024-2026. The current stock price corresponds to PE of 11.6, 10.3, and 9.3 times, respectively. The first coverage gives a “buy” rating.
Risk warning: Raw material prices have risen above expectations; industry competition has intensified; market demand has recovered less than expected; there have been adverse changes in the macro environment; the cited data sources have published erroneous data; and the real estate easing policy falls short of expectations.