Incident: The company announced its 2023 annual report. During the reporting period, net profit to mother and net profit without return to mother were 328.23, 22.73, and 1,841 million, respectively, and +5.15%, +7.16%, and +2.05%, respectively. 2023Q4 realized revenue, net profit to mother, and net profit after deducting non-return to mother were 74.62, -0.8, and -331 million, respectively. 2023Q4 revenue was -4.76% year-on-year.
Incident: The company released its 2024 quarterly report. During the reporting period, net profit attributable to mother, and net profit without return to mother were 71.49, 3.48, and 310 million, respectively, compared with -4.61%, -9.81%, and -4.39%, respectively.
Direct sales declined and channels flourished, and overall revenue increased steadily in 2023. The company's revenue was +5.15% year-on-year in 2023, and achieved steady growth against the backdrop of a sharp decline in new real estate starts throughout the year. The core behind it are two key business model changes and an increase in the market share of the main waterproof business: 1) De-direct sales, that is, the traditional packaging model, reflected in direct sales revenue and engineering construction revenue in 2023, -19.63% and -26.30%, respectively. Direct sales business revenue accounted for -9.74pcts; at the same time, the company's key retail and engineering channel business revenue were +28.11% and +22.58%, respectively. The ratio is +5.06 pcts and +5.43 pcts, respectively. The total share of retail and engineering channel revenue in 2023 has reached 66.41%; 2) New categories such as mortar powder are expanding at an accelerated pace. The mortar powder business achieved revenue of 4.196 billion in 2023, +40% year over year, accounting for 12.79% of revenue, and the mortar powder business became the star product contributing to the company's main revenue growth in 2023; 3) The new housing construction area in 2023 was -20.4%, but the company's waterproof membrane business revenue was +6.71% year over year, and we expect the market share to increase.
Profitability levels and cash flow improved simultaneously in 2023, and the transformation effect was remarkable. The company achieved a gross profit margin of 27.69% in 2023, +1.92pct. Behind the increase in gross margin, on the one hand, the average annual price of asphalt, the company's core raw material, was -4.66% year-on-year, and the reduction in procurement costs released profits; on the other hand, there was a marked increase in the share of high-margin retail channels (39.42% gross profit margin in 2023) and engineering channels (23.70% gross profit margin in 2023). In terms of cash flow, the company's net cash flow from operating activities in 2023 was $2.03 billion, a year-on-year increase of +1.449 billion, showing a significant improvement.
Due to the lengthening age of accounts receivable, the scale of impairment increased dramatically in 2023, hampering performance. In 2023, the company made a total of 1,039 billion asset impairment reserves, of which bad debt losses on accounts receivable, bad debt losses on other accounts receivable, and impairment losses of other non-current assets were 5.72, 1.63 million, and 196 million respectively. The company's impairment accrued significantly more in 2023 than in previous years, mainly due to a sharp increase of 14.15 pcts in stock accounts receivable.
2024Q1 made a steady start under a high base and maintained profit resilience in the face of industry headwinds. 2024Q1 real estate started new construction -27.8% year-on-year. The decline was increased compared to 2023. The 2023Q1 base was high under the demand-side headwind (backlog demand was released centrally after the epidemic was liberalized), the company's revenue was -4.61% year over year, and net profit to mother was -9.81%. It maintained strong resilience in the face of industry headwinds, demonstrating the strong resilience of industry leaders to risks. The net cash flow from 2024Q1's operating activities was -1,889 million, and the net outflow scale narrowed sharply over the same period last year, reflecting that the company's channel transformation has had a profound impact on its own business model.
I am optimistic that the company's business transformation will continue to be implemented and effective. The industry-side pattern continues to be optimized, and company-side channel reform and new category development continue to be implemented and promoted. Looking back: 1) The gradual implementation of new waterproofing regulations has led to market expansion; 2) as the industry clears up, the company adheres to the partner priority strategy, focusing on the continued decline in local channels, and the market share level should be further improved; 3) Under the C-side priority strategy, Civil Construction Group's revenue continues to grow rapidly, while introducing new categories such as pipes and adhesives to improve customer unit prices and channel efficiency. We expect that the Civil Construction Group will maintain a relatively rapid growth rate.
Investment advice: Considering that the demand side of downstream real estate is still under heavy pressure, we lowered the company's profit forecast and introduced the 2026 profit forecast. The net profit for 2024-2026 is expected to be 29.87, 36.07, and 4.301 billion, respectively (41.70 billion and 5.237 billion before 2024-2025, respectively), corresponding to the current stock price PE of 12.4, 10.2, and 8.6 times, respectively. Considering that the new mandatory national standard waterproof regulations will be implemented more fully in 2024, which will benefit leading enterprises represented by Yuhong and the steady progress of the company's channel transformation, with remarkable results, we maintain the rating as “buy”.
Risk warning: Demand for downstream real estate falls short of expectations; expansion of new categories falls short of expectations; large fluctuations in raw material prices; risk of rapid growth in accounts receivable; risk of asset and credit impairment; implementation of industry policies falls short of expectations; risks caused by untimely information updates.