Horizon CD's core net profit in 2023 grew 10% YoY to RMB1bn, in line with our expectation. While the lack of dividend payout is disappointing given that positive free cash flow is achieved, we believe the 15% share price pullback yesterday was overdone. We revise down our 2024E-25E earnings forecast by 6-7%, as (1) we lower our operating lease service revenue given less capex will be spent on equipment, (2) we revise down the rental rate given the continuous downtrend. These two factors could be slightly offset by the positive impact from the lower depreciation expense after the change in accounting policy starting this year. On the valuation front, we no longer apply 13x target P/E as it's less likely to be reached after the recent removal from the Stock Connect. Our new TP of HK$3.7 is based on 9x 2024E P/E, which is 10% discount to the current P/E of Huatie (603300 CH, NR). Horizon CD is trading at only 3x 2024E P/E, suggesting that the market is giving almost no value to any potential earnings growth.

Key highlights in 2023 results: Total revenue grew 22% YoY to

RMB9.6bn. Gross margin contracted 0.7ppt YoY to 39.1%, as platform & engineering business (lower margin) grew faster than operating lease services. Selling & distribution expense ratio increased 1.2ppt YoY to 5.4%. For the sake of prudence, Horizon increased the net expected credit loss (ECL) ratio by 1.5ppt YoY to 2.9%. Excluding the listing expense as well as the interest expense & FX change from the redemption liabilities on pre-IPO investment, core net profit grew 10% YoY to RMB1.04bn. Operating cash inflow increased 40% YoY to RMB3.95bn. With net capex of only ~RMB1.8bn, Horizon achieved free cash flow of RMB2.1bn. Net debt to equity ratio dropped to 147% at end 2023 (vs 286% in Dec 2022).

Operating lease services (53.5% of revenue). The segment revenue dropped 1% YoY to RMB5.1bn in 2023 (-9% YoY in 2H23), as the decrease in rental rates offset the increase in the overall utilisation rate. As at end 2023, Horizon had 494 service outlets (4 overseas) and 232k customers (+47% YoY).

Engineering & technical services (30.8% of revenue). The segment revenue grew 39% YoY to RMB2.9bn in 2023 (accelerated in 2H23), with gross margin reduced by 0.8ppt YoY to 29.2%.

Platform & other services (15.7% of revenue). The segment revenue surged 1.7x YoY to RMB1.5bn in 2023. Breakdown: (1) Platform service revenue surged 3x YoY to RMB984mn, driven by the adoption of asset-light model for AWP business. The managed fleet size of AWP grew >1.6x YoY to 56.7k units. (2) Trade and others revenue grew 72% YoY to RMB522mn. The segment gross margin expanded 8.7ppt to 40.2%.