Introduction to this report:

Huayang International actively lays out the digital culture industry and leverages the company's advantages in the creative and creative industries, which is expected to improve the company's profit level and core competitiveness. The optimization of real estate policies and fundamentals will also support the development of the company's main business.

Key points of investment:

Maintain an increase in holdings. Due to the downturn in construction in the real estate industry, the company's business was affected by changes in the industry, and the forecast for 2024-2026 will be 0.83/0.95/1.06 (originally 1.00/1.18/1.31) yuan, an increase of 0%/15%/12%.

Maintain the target price of 16.37 yuan, corresponding to 20 times PE in 2024.

Profit declined in the first 3 quarters due to industry adjustments, and cash flow improved year over year. (1) In the first three quarters of 2024, revenue of 0.812 billion yuan decreased by 22.90% (Q1-Q3 -11.11/-35.03/ -16.03%), and net profit of 0.11 billion yuan decreased by 19.46% (Q1-Q3 -25.13/-14.90/ -23.50% year-on-year). (2) Expense rate 17.27% (+0.44pct) for the first three quarters of 2024, net profit margin 13.78% (+0.59pct), weighted ROE 7.15% (-2.03pct). (3) Net operating cash flow for the first three quarters of -0.027 billion yuan (same period in -0.03 billion yuan), of which Q1 to Q3 was -0.95/-0.30/+0.098 billion yuan (2023Q1-Q4 was +0.83/-0.20/+0.317 billion yuan). (4) As of the end of the third quarter of 2024, accounts receivable of 0.473 billion yuan decreased by 23.69% year-on-year, and accounts receivables/operating income was 58.26% (-0.61 pct). Total impairment and profit for the first 3 quarters was -0.03% (+5.23pct), and impairment and accounts receivable were -0.01% (+1.47pct).

Set up industrial investment funds and wholly-owned subsidiaries to actively lay out the digital culture industry. (1) On September 23, it was announced that it was jointly invested with partners to establish a digital culture industry development investment fund. The company pledged 100 million yuan of capital with its own funds, accounting for 50% of the partnership's investment amount, and the initial paid-in investment amount was 15 million yuan. Through direct or indirect equity investment in the field of digital culture, we give full play to the company's advantages in the creative and creative industries and broaden the company's industrial layout. (2) On September 23, it was announced that Huayang Digital Culture (Jiangxi) Co., Ltd. was established with 10 million yuan of its own capital. This investment is conducive to leveraging the company's creative and creative advantages, fully integrating the company's existing resources, and deepening the company's research and practice in content creation, product innovation, and market expansion.

The technical advantages of BIM, digitalization, and prefabricated building tools benefit from real estate policy optimization. (1) The company continues to upgrade and optimize the BIM forward design platform - Huayang Express Construction, and has gradually built BIM forward design capabilities for all specialties such as architecture, structure, water supply and drainage, HVAC, electrical, prefabricated, and interior. Self-developed online management platform for the entire construction industry chain—CAPOL iBim. (2) Accelerate the AI technology development process and iteration, expand the application scenarios of AI design, and accelerate the integration of AI technology and the entire design process. (3) Since 2004, prefabricated building design research has been carried out, diversified product portfolios have been achieved through standardized production methods, and a core competitive advantage has been established in the fields of talent housing and guaranteed housing. (4) On November 13, preferential real estate tax policies such as deeds tax and land value-added tax were implemented.

Risk warning: macroeconomic policy risks, digital culture business falling short of expectations, etc.