3Q24 results miss our expectation
Oriental Yuhong Waterproof announced its 3Q24 results: In 1-3Q24, revenue fell 14% YoY to Rmb21.7bn, and net profit attributable to shareholders fell 46% YoY to Rmb1.28bn. In 3Q24, revenue fell 24% YoY to Rmb6.48bn and net profit fell 67% YoY to Rmb334mn, missing our and market expectations, mainly due to lower revenue and heavier-than- expected pressure on expenses.
Rising revenue pressure; expenses under pressure; sharp decline in profit margin.
1) Revenue fell; distribution channels remained stable. Due to tight market demand and lack of funds, the firm's revenue fell quickly in 1-3Q24 (-14% YoY; revenue fell 24% YoY in 3Q24). Specifically, revenue from engineering projects rose about 6% YoY to Rmb10bn, that from retail channels grew 2% YoY to Rmb7.8bn, and that from the direct sales channels declined more than 50% YoY. In 1-3Q24, the proportion of engineering projects and the retail segment also increased to 46% and 36% from 37% and 30% in the same period last year. In 3Q24, we estimate that revenue from the retail segment fell 8% YoY, revenue from engineering projects remained largely flat YoY, and that from direct sales channels and centralized procurement fell about 70% YoY.
2) Solid gross margin. Despite fierce competition and price wars YTD, the firm maintained solid gross margin thanks to its rising exposure to distribution channels. In 3Q24, gross margin rose 0.1ppt QoQ to 28.9% (- 0.5ppt YoY).
3) Expense ratio rose sharply and net margin came under pressure. In 3Q24, the expense ratio rose 3.8ppt YoY to 18.5%, with selling expenses up 5% YoY, pushing its expense ratio up 3ppt and net margin down 6.8ppt YoY to 5.2%.
Operational quality improving. 1) Turnover days remained largely stable: In 3Q24, accounts receivable turnover days fell 12 days YoY to 126 days, inventory turnover days rose 5 days YoY to 75 days, and accounts payable turnover days dropped 3 days YoY to 59 days. 2) Cash flow continued to improve: In 1-3Q24, the cash-to-revenue ratio rose 4.8ppt YoY to 100%, and in 3Q24, the ratio rose 18ppt YoY to 115%, pushing operating cash flow up Rmb4.27bn YoY to -Rmb492mn in 1-3Q24.
Operating cash flow increased Rmb1.65bn YoY to Rmb835mn in 3Q24. 3) Debt-to-asset ratio rose 2.7ppt QoQ to 44.1% in 3Q24, implying a net gearing ratio of 10.4%.
Trends to watch
Focusing on cash flow; awaiting stabilization of demand. Looking ahead, we believe the firm will continue to improve its cash flow by expanding distribution channels and strengthening payment collection amid weakening demand, boding well for its growth when the sector recovers. Meanwhile, the firm announced that it plans to use Rmb500- 1,000mn to buy back shares, proving its ample cash flow.
Financials and valuation
We maintain our 2024 and 2025 net profit forecasts. The stock is trading at 19x and 14x 2024e and 2025e P/E. Given improving risk appetite and the firm's position as an industry leader, we maintain OUTPERFORM and raise our target price 28% to Rmb16, implying 21x and 16x 2024e and 2025e P/E, offering 14% upside.
Risks
Demand recovery disappoints; competition intensifies; raw material prices fluctuate.
