726 HK announced that its profit for fiscal year 20 was about HK $160 million, an increase of 40.8 per cent over the same period last year and about 8-20 per cent higher than the market and our expectations. It is worth mentioning that the company recorded a core loss in fiscal year 19, and recent Yingxi indicated a strong reversal in its performance in fiscal year 20. This is due to (1) the increasing penetration of domestic prefabricated buildings has driven the sales of prefabricated building components up 72% year-on-year, and revenue has increased by about 59% year-on-year; (2) the gross profit margin has increased under large-scale production (29.5%, compared with fiscal year 19: 24%). We believe that the company's profits will enter a high growth phase in the next few years, mainly due to (1) the rapid growth of the prefabricated building component market and (2) closer cooperation with Jianye Group. The company currently trades at a price-to-earnings ratio of 18.4x / 11.7x for fiscal year 20x21 and a CAGR of 48% for three-year earnings. The recent non-fundamental sell-off provides a good entry point for long-term investors.

A non-fundamental sell-off may end in the short term

The company's shares fell about 16% after Yingxi's announcement. We believe that the sell-off is not driven by fundamentals, but more relevant to historical reasons (see link). The main control of the company (72.27%) has been transferred to the new controlling shareholder, Mr. Hu Baosen (the major shareholder of Jianye Group) in 2019. We estimate that if the seller needs to completely sell his holdings, it will still take 6-10 trading days to complete.

The company is on the track of rapid growth.

We expect the market size of precast concrete (PC) to maintain rapid growth and reach 250 billion yuan in 2025, compared with 77 billion yuan in 2019, with a 5-year compound annual growth rate of ~ 17%. We expect to gain more market share in the next few years, especially in the core areas of Jianye Group, such as Henan Province. The company also extends its business to the entire supply chain, from a prefabricated component manufacturer to an integrated industrial chain model provider, providing services including construction, decoration and landscaping. With the addition of fast-growing PC business, we expect the above new business to be a major driver of the company's future growth. We expect its earnings to grow by 57% in fiscal year 21 and 45% compared with the same period last year.

There will be more catalysts in the future

We believe that the company will have more stock price catalysts in the next six months, including: (1) the company will provide more guidance on the future after the results in fiscal year 20, which may lead to an increase in market expected earnings; and (2) more favorable policies are expected to be introduced in the 14th five-year Plan to support prefabricated building components.