Performance was in line with expectations, and increased financial expenses dragged down the net profit growth rate. The company announced that in the first quarter of 2024, it achieved operating income of 549.32 billion yuan, a year-on-year increase of 4.7%, net profit to mother of 14.92 billion yuan, an increase of 1.2% year-on-year; net profit after deduction of 14.74 billion yuan to mother, an increase of 1.1% over the previous year. The Q1 performance was in line with expectations. The net profit growth rate was lower than the revenue growth rate, mainly due to a sharp increase in financial expenses due to exchange losses.

The main construction business structure has been optimized and steady growth, and real estate profitability has improved. By business, in the first quarter of 2024, the company's housing construction/infrastructure/real estate achieved operating income of 3658/1277/46.5 billion yuan, a year-on-year change of +6.1%/+6.4%/-8.8%; realized gross profit of 226.1/109.2/8.92 billion yuan, an increase of 6.5%/8.3%/7.8% year-on-year. The main construction business grew steadily, and real estate development revenue was under pressure, but profitability improved markedly, and gross margin increased by 3 pcts. In terms of new orders, 1) The housing construction business signed a new contract amount of 806.2 billion yuan in the first quarter, an increase of 11.4% over the previous year, and the business structure continued to be optimized. Among them, the share of public construction projects continued to increase, with industrial plants growing by 39.8% year on year, continuing to grow rapidly under a high base (23Q1 growth rate of over 90%); the share of residential real estate projects continued to decline, with residential orders for commercial housing in Q1 accounting for 22%, down 1.5 pct year on year. 2) The infrastructure business signed a new contract amount of 30.5 billion yuan in the first quarter, an increase of 23.2% over the previous year. Among them, energy engineering, water and environmental protection, water conservancy and water transportation grew rapidly, with growth rates of 235%/86%/156%, respectively, with impressive performance. 3) Contract sales of the real estate business in the first quarter were 77.8 billion yuan, down 31%; the sales area was 2.63 million square meters, down 48%. Real estate sales pressure remained, but the overall performance was better than industry leaders. The newly purchased land reserve is about 1.62 million square meters, mainly located in first-tier and second-tier cities.

Gross margin remained stable, and cash flow increased due to the impact of the real estate business. The company's consolidated gross profit margin for the first quarter of 2024 was 8.09%, YoY - 0.01 pct, which remained stable year-on-year. The cost rate for the period was 3.76%, YoY +0.1 pct. Among them, sales/management/ R&D/finance changed -0.03/-0.05/-0.07/+0.26 pcts respectively. The financial expense ratio increased significantly, mainly affected by the increase in exchange losses. Asset (including credit) impairment losses amounted to RMB 26 million, a year-on-year decrease of RMB 260 million. Investment income decreased by 404 million yuan year over year. Net interest rate to mother was 2.72%, YoY - 0.09 pct. The slight decline in profit margin was mainly affected by the increase in financial expenses. The company's net operating cash flow for the first quarter was 96.6 billion yuan, an increase of 31.2 billion yuan over the same period last year. It was mainly affected by the two factors of a decrease in sales payments from the real estate business and an increase in land purchases. The company continues to carry out special actions to improve cash flow management to strengthen the management of business sources, and future cash flow is expected to improve.

Investment advice: We predict that the company's net profit for 24-26 will be 570/599/62.5 billion yuan, respectively, up 5%/5%/4% year-on-year, EPS will be 1.37/1.44/1.50 yuan/share, respectively. The current stock price will correspond to PE 4.0/3.8/3.6 times, respectively, maintaining a “buy” rating.

Risk warning: risk of impairment of accounts receivable, risk of impairment of real estate inventory, risk of a sharp decline in real estate sales.