3Q24 results in line with our expectations
Capol International & Associates announced its 1-3Q24 results: Revenue fell 22.9% YoY to Rmb812mn, and attributable net profit fell 19.5% YoY to Rmb112mn. In 3Q24, revenue fell 16.0% YoY to Rmb293mn, and attributable net profit fell 23.5% YoY to Rmb53mn. The firm's 3Q24 results are in line with our expectations.
Revenue decline has narrowed; GM performs well. In 3Q24, the firm's revenue fell about 16%, narrower than the decline in 1H24. However, we think it reflects the insufficient downstream demand and pressured revenue. In 3Q24, GM rose 3.6ppt YoY and 9.5ppt QoQ to 45.2%, experiencing an improvement despite revenue pressure. We attribute this to the firm's efforts to focus on its core high-margin design business and gradually reduce the size of its general contracting business.
Expense ratios have improved in 3Q24. In 3Q24, the selling, G&A, and R&D expense ratios fell 1.2ppt, 1.5ppt, and 1.1ppt YoY, while the financial expense ratio rose 1.1ppt YoY. We attribute it to the firm's efforts to strengthen expense management and improve operating efficiency.
Impairment provision drags earnings. In 3Q24, the firm made provisions for asset and credit impairment losses of about Rmb18.03mn (vs. a net write-back of about Rmb1.47mn in 3Q23), weighing on the firm's net margin.
Cash flow has improved in 1-3Q24; payment collection has accelerated markedly. In 1-3Q24, the firm's net operating cash flow was about -Rmb26.9mn (vs. -Rmb30.1mn in the same period last year), showing improvement. In 3Q24, the firm's net operating cash flow improved significantly by Rmb117.8mn YoY to about Rmb97.8mn. We think the firm may have strengthened its receivables management, driving an accelerated inflow of payment collection.
Trends to watch
Plans to invest in establishing a digital culture industry development investment fund; business structure to improve. On September 24, the firm announced a plan to jointly establish a digital culture industry development investment fund estimated at Rmb200mn. The firm will contribute Rmb100mn using its own funds. On the same day, the company announced the establishment of Huayang Digital Culture (Jiangxi) Co., Ltd. with its funds of Rmb10mn to further leverage the company's advantages in the creation industry, expand the room for business development, fully integrate its existing resources, improve asset operation efficiency, and enhance its comprehensive competitiveness. We believe the firm's business expansion and transformation in the digital culture industry will help it enhance its growth capability and comprehensive competitiveness.
Financials and valuation
As we lower our assumptions for revenue carryover ratio and GM, we lower our 2024 attributable net profit forecast 34% to Rmb158mn and introduce 2025 attributable net profit forecast at Rmb169mn, implying 19.7x 2024e and 18.4x 2025e P/E. We maintain an OUTPERFORM rating. Given recovering market expectations, we maintain our TP at Rmb18.0 (22.3x 2024e and 20.9x 2025e P/E), offering 13.4% upside.
Risks
Slower-than-expected execution of backlog projects.
