1H24 results in line with our expectationSinoma International Engineering (Sinoma) announced its 1H24 results: Revenue rose 1.7% YoY to Rmb20.90bn and net profit attributable to shareholders grew 2.3% YoY to Rmb1.40bn. In 2Q24, revenue rose 0.7% YoY to Rmb10.61bn, and net profit attributable to shareholders grew 1.6% YoY to Rmb763mn. The 1H24 results are in line with our expectations.
Engineering business maintained revenue growth despite headwinds; overseas expansion progressed rapidly. In 1H24, the firm's new engineering service contracts fell 18% YoY to Rmb24.15bn. Specifically, new domestic contracts rose 58% YoY to Rmb4.42bn, and new overseas contracts rose 4% YoY to Rmb19.73bn. In 1H24, revenue from engineering services rose 4.82% YoY to Rmb12.10bn, and gross margin rose 0.62ppt YoY to 15.54%.
Equipment business faced significant pressure, but market expansion efforts have paid off. In 1H24, the firm's new equipment contracts fell 15% YoY to Rmb3,344mn, with new domestic contracts down 33% YoY to Rmb2,103mn and overseas contracts up 58% YoY to around Rmb1,241mn. In 1H24, equipment business revenue fell 23.07% YoY to Rmb2.92bn, and gross margin fell 0.51ppt YoY to 23.25%. The self-sufficiency rate of 10 core equipment has exceeded 60%, and the company continued to expand equipment business overseas and in other sectors. In 1H24, 32% equipment revenue came from overseas markets, and 49% from other sectors.
Quality and growth of operation and maintenance business improved; overall performance encouraging. In 1H24, new contracts for operation and maintenance services rose 41% YoY to Rmb8,897mn, with new contracts for mine operation and maintenance growing 47% YoY to Rmb5,527mn. In 1H24, revenue from the operation and maintenance business rose 22% YoY to Rmb5,673mn, and gross margin rose 3.18ppt YoY to 21.93%. As of end-1H24, the firm had 348 mine operation and maintenance projects in operation (with ore supply up 9% YoY), and 62 cement operation and maintenance projects in operation (with annual production capacity of more than 100mnt).
Expense ratio rose on FX rate fluctuations. In 1H24, selling, G&A, and financial expense ratios rose 0.07ppt, 0.59ppt, and 0.73ppt YoY, as the firm recognized Rmb217mn FX losses in 1H24. Cash flows remained strong. Net operating cash flow totaled Rmb885mn in 1H24 (vs. - Rmb940mn a year earlier), as the firm strengthened contract settlement and payment collection.
Trends to watch
Business model improving; strong growth potential. We expect the firm's engineering business to maintain stable volume given easing impact from domestic projects, and stable demand for technological upgrading, and overseas new project demand. We also expect penetration rate of its equipment business to increase, boosting revenue and profit contribution. The firm's operation and maintenance (O&M) business has been growing rapidly recently, and we believe safety and environmental requirements for mine operation and strong demand for cement operation and maintenance will continue to drive the firm's O&M business to grow. We see strong growth potential in the medium-to-long term, and see upside in gross margin.
Financials and valuation
We leave our 2024 and 2025 attributable net profit forecasts unchanged at Rmb3,415mn and Rmb3,900mn. The stock is now trading at 7.4x 2024 and 6.5x 2025e P/E. We maintain an OUTPERFORM rating and target price of Rmb14.7, implying 11.4x 2024e and 10.0x 2025e P/E, offering 54% upside.
Risks
Disappointing growth of equipment and operation & maintenance business; slower-than-expected progress in contract execution.
