3Q23 results miss our expectations

Gold Mantis Construction Decoration announced its 3Q23 results: In 1- 3Q23, revenue fell 5.89% YoY to Rmb16.47bn, and net profit attributable to shareholders fell 29.24% YoY to Rmb851mn. In 3Q23, revenue fell 4.82% YoY to Rmb5.90bn, and attributable net profit fell 29.20% YoY to Rmb238mn, missing our expectations due to increased provisions for receivables impairments in 3Q23.

GM slightly under pressure; expense ratio control stable. In 3Q23,

GM fell 1.1ppt YoY to 14.3%. Expense ratio fell 0.4ppt YoY to 7.6%, with selling and R&D expense ratios up 0.1ppt and down 0.6ppt YoY to 1.5% and 3.3%, and G&A and financial expenses staying flat at 2.6% and 0.2%.

Narrowed impairment losses contributed positively to net profit. Asset and credit impairment losses narrowed Rmb21.89mn YoY to Rmb128mn. Net margin fell 1.4ppt YoY to 4.0%. Overall cash flow improves. Net operating cash outflow totaled Rmb153mn in 3Q23, down Rmb41.32mn YoY.

Trends to watch New order growth accelerates sharply YoY; design business sees

strong recovery. In 3Q23, new orders rose 14.8% YoY to Rmb6.41bn.

Specifically, orders of the public building decoration, residential building, and design businesses grew 9.3%, 15.0%, and 81.1% YoY, accelerating 48.1ppt, 16.0ppt, and 115.4ppt YoY. The firm has Rmb24.04bn of orders on hand and Rmb4.53bn of orders won but not signed. We believe ample orders on hand will support earnings growth.

Expanding presence in prefabricated building technologies. The firm chaired the establishment of the Technical Specifications for Prefabricated Decoration of Residential Buildings, the first prefabricated building

standard approved by the China Building Decoration Association, which we believe will help solidify the firm's leading position. Meanwhile, the firm has accelerated its exploration of the healthcare and elderly care services and education businesses, and has qualifications in areas such as industrial pipelines for special equipment. Looking ahead, we expect the firm to seize opportunities from business development and drive efficiency improvement in the medium and long term, thanks to its efforts to build high technological barriers in prefabricated buildings and BIM digitalization.

Balance sheet healthy; upbeat on medium-to-long-term growth. At

end-3Q23, the liability-to-asset ratio fell YoY to 64% (vs. 66% at end- 3Q22), maintaining a reasonable level. Net gearing ratio was -31%, still maintaining net cash position. We believe that the current industry downturn may accelerate the supply clearance. Thanks to its industry- leading brand, capital management, and R&D capabilities, we expect the firm to achieve rapid growth after demand recovers and stabilizes. We remain upbeat on the medium-to-long-term growth outlook.

Financials and valuation

Considering the weak demand recovery, we lower our 2023 and 2024 earnings forecasts by 34% and 40% to Rmb951mn and Rmb1.07bn. The stock is trading at 11.6x 2023e and 10.3x 2024e P/E. Maintain OUTPERFORM rating. Considering the sector's valuation is near the bottom, we only cut our target price 20% to Rmb5.2, implying 14.5x 2023e and 12.9x 2024e P/E and offering 26% upside.

Risks

Slower-than-expected order delivery; higher-than-expected provisions for impairment losses.