Net profit to mother was achieved in 2023, and revenue and profit declined slightly in the first quarter of 2024. In 2023, the company achieved operating income of 39.38 billion yuan, +11.9% year on year, gross profit of 3.214 billion yuan, +29.4% year on year, and realized net profit of 730 million yuan. As the scale of depreciation accrual in 2023 was higher than expected, the final net profit to mother was slightly lower than the previous forecast of 801 million yuan. 2024Q1 achieved operating income of 6.73 billion yuan, -22.3% year-on-year, and realized net profit of 148 million yuan, or -11.2% year-on-year.
The profitability of the general engineering contracting business increased significantly, boosting the company's overall gross profit margin. In 2023, the company achieved operating income of 39.38 billion yuan, slightly lower than the expected value of 41.49 billion yuan. The overall gross margin was 8.2%, higher than the expected value of 7.3%, and realized gross profit of 3.214 billion yuan, higher than the estimated value of 3,025 billion yuan. The deviation between actual operating data and expectations mainly comes from the engineering technology service business. Among them, the general engineering contracting business achieved revenue of 32.03 billion yuan, +15.8% year over year, lower than expected 3.5%, gross margin of 2.73%, a significant increase of 0.81 pct over the previous year, and realized gross profit of 874 million yuan, +64.1% year over year, higher than expected +31.7%.
It is expected that the scale of subsequent impairment will continue to decline. In 2023, the company calculated impairment losses of 321 million yuan, including impairment losses of 65 million yuan in fixed assets and 230 million yuan in impairment losses of various types of receivables. The total amount of impairment in 2023 was significantly lower than the $1,267 million in 2022, but it was still significantly higher than the $83 million in 2021. Two assets, “Inner Mongolia power plant assets” and “accounts receivable for Tenghui PV”, had a significant impact on impairment in 2022 and 2023. The remaining risk exposure was further reduced after this calculation, and it is expected that the scale of subsequent impairment will continue to decline.
The engineering business grew steadily, and the profitability of turnkey contracts increased significantly. The company's engineering business achieved revenue of 34.37 billion yuan in 2023, +13.1% year on year, 50.26 billion yuan of new orders over the year, +22.1% year on year, and orders in hand at the end of the year were 43.29 billion yuan, an increase of 44.0% over the end of the previous year. In the engineering business, the design and consulting business achieved revenue of 2.34 billion yuan, -13.6% year-on-year, while the general engineering contracting business achieved revenue of 32.03 billion yuan, +15.8% over the same period last year. In terms of gross margin, in 2023, the company's design and consulting gross profit margin was 63.03%, up 10.18 pcts year on year, and the gross profit margin of the total engineering contract was 2.73%, up 0.81 pct year on year. Due to the low gross margin of the general engineering contracting business, the increase in gross margin of 0.81 pct had a significant effect on boosting profits.
The semiconductor business is operating steadily, and product upgrades drive an increase in gross margin. The company's semiconductor business is mainly engaged in post-process services for semiconductor production, including probe testing, packaging, package testing, module assembly, and module testing services. In 2023, the company's semiconductor business achieved revenue of 4.53 billion yuan, -2.1% year-on-year, maintaining a relatively stable revenue scale. Haitai Semiconductor, a joint venture subsidiary of the company and SK Hynix, promoted process upgrades and production capacity increases for DDR5 products, and the gross margin increased to 14.05% from 13.06% the previous year. In 2023, Haitai Semiconductor/Taiji Semiconductor, the core operating entities of the company's semiconductor business, achieved operating revenue of 3.805 billion yuan/754 million yuan respectively, and net profit of 219 million yuan/0.04 billion yuan.
The overall operating cash flow is steady. The net cash flow from the company's operating activities in 2023 was 1,258 million yuan, -31.4% year on year, operating cash inflow was 37.39 billion yuan, +10.6% year over year, and operating cash outflow was 36.13 billion yuan, +13.0% year over year. The main reason for the year-on-year decrease in net cash flow was due to penalties on the company's photovoltaic power plant assets and the return of 413 million yuan of electricity bill subsidies already collected in 2023. The company's cash to cash ratio in 2023 was 94.42%/89.58%, respectively, compared with -0.94 pct/+2.28 pct in the previous year.
Repayments increased in the first quarter of 2024, and an accelerated carry-over of major project orders can be expected. In the first quarter of 2024, the company achieved operating income of 6.726 billion yuan, and a net cash flow outflow of 527 million yuan from operating activities, which was the lowest first-quarter outflow in 5 years. The revenue ratio rose to 103.1%, the highest in the first quarter of 5 years. In the first quarter of 2024, the total amount of the company's accounts receivable and contract liabilities was 3.09 billion yuan, a slight decrease of 50 billion yuan from the end of the previous year, notes receivable and accounts receivable of 5.76 billion yuan, a decrease of 346 million yuan from the end of the previous year, the first net decrease in the first quarter of the past five years. Therefore, it can be judged that the main reason for the decline in the company's revenue scale in the first quarter and the obvious increase in cash inflows may be due to the fact that there was more recovery of stock receivables; considering that the company's on-hand orders at the end of 2023 were +44.0% year over year, and there was no significant increase in contract liabilities in the first quarter, the company's current major orders may be concentrated in the early preparation stage, resulting in fewer advance payments received and less carry-over revenue. It can be expected that major projects will accelerate into the centralized construction phase, and revenue and profits may pick up.
Investment advice: Lower profit forecasts and maintain a “buy” rating. The company is a leading high-tech engineering design and general contracting enterprise. The company has sufficient orders and has signed a number of major electronic engineering general contracting projects. The advantages of turnkey business platforming are beginning to show, bargaining power in the industrial chain continues to increase, and profitability has bottomed out and rebounded.
Considering that there is still a potential risk of impairment of the company's individual assets, the profit forecast was slightly lowered to forecast the company's 2024-2026 net profit of 9.83/11.13/1,235 billion yuan (previous value of 10.43/13.63/17.61 billion yuan), and earnings per share of 0.47/0.53/0.59 yuan (previous value 0.49/0.65/0.84 yuan), corresponding to the current stock price PE of 13.4/11.8/10.7X, maintaining the “buy” rating.
Risk warning: the risk of changes in the macroeconomic situation, the risk of policy changes, the risk of market competition, the risk of the subsidiary Haitai Semiconductor being dependent on a single customer, the risk of increased bargaining power of equipment suppliers in the general engineering contract business, the risk of loss of core technical personnel, and the risk of depreciation of accounts receivable.