We lower the TP to HK$2.85, but reiterate "Buy" rating. We lower the EPS forecasts for UCD (the "Company") in 2024/ 2025 by 12.0%/ 13.1% to RMB0.683/ RMB0.721, respectively, and initiate the EPS forecast for 2026 at RMB0.704. We lower the TP to HK$2.85, equivalent to 3.8x/ 3.6x/ 3.7x 2024/ 2025/ 2026 PER.
2023 shareholders' net profit decreased 9.0% YoY to RMB873 million, and results were below expectation. 1) Total revenue in 2023 was RMB10,362 million, down 0.7% YoY, of which design, survey and consultancy was RMB4,867 million, up 9.1% YoY, and construction contracting was RMB5,495 million, down 8.0% YoY. 2) In 2023, the gross margin was 18.2% (+0.6 ppt), the expenses ratio was 15.8% (+1.2 ppt), the net profit margin was 8.4% (-0.8 ppt), the weighted ROE was 12.3% (-2.5 ppt), and total debt ratio was 69.3% (-1.4 ppt).
Net operating cash flow decreased YoY, while accounts receivable and impairment losses increased YoY in 2023. 1) Net operating cash flow in 2023 was RMB329 million (2022: RMB1,149 million). 2) Net operating cash flow and investing cash flow combined was -RMB288 million (2022: +RMB826 million). 3) Accounts receivable increased 22.0% YoY to RMB4,501 million, and impairment losses of financial asset and contract assets increased 17.4% to RMB286 million.
New contracts signed decreased 30% YoY to RMB6,168 million in 2023. 1) Among them, new contracts signed for design, survey and consultancy was RMB4,498 million (-15.5%), EPC was RMB1,670 million (-52.0%). 2) The Company is intensifying its focus on rail transit construction, particularly in the Beijing market, the Yangtze River Delta, and the Greater Bay Area, with plans to expand into less developed regional markets, to ensure sustainable growth in this sector. 3) The Company successfully secured multiple bids for urban renewal projects across various sectors, including educational, healthcare, and residential communities. It has also ventured into comprehensive regional development projects, such as the TOD integrated development at Xiangqian Station (Fuzhou City) of Binhai Express. 4) It is exploring new business models such as "rail + cultural tourism" and is innovating in investment and financing strategies to adapt to changing market conditions and government policies. This approach includes transitioning from project-based investments to equity cooperation and industry chain collaborations. 5) It has been maintaining a 27% dividend payout for the past two years, implying a 9.9% dividend yield at current share price.
Risks: 1) Government infrastructure spending may be lower than expected;
2) overseas project risks.