Investment suggestion
Oriental Garden announced its results for the third quarter of 2020: operating income in the first three quarters was 4.53 billion yuan, an increase of 18.0% over the same period last year, with a net profit of 18.17 million yuan and a year-on-year profit of 18.17 million yuan (1-3Q19 loss 890 million yuan). However, due to our cautious expectations for the company's future order and revenue growth, and the risk of major shareholder equity pledge closing, we downgrade the company to "neutral". The reasons are as follows:
3Q20 results are in line with previous forecasts and our expectations. 3Q20 achieved 2.75 billion yuan in revenue in the single quarter, an increase of 67.1% over the same period last year, and the revenue side continued to repair on a month-on-month basis (1Q/2Q/3Q-57% compared with the same period last year); 3Q20 gross profit margin decreased from 7.0ppt to 19.6% year-on-year; management expense rate decreased 12.3ppt from the same period last year, mainly due to high base and optimization of company management structure. The loss of credit impairment decreased by 83.2% to 12.64 million yuan compared with the same period last year, mainly due to the decrease in the balance of the company's engineering receivables and the decrease in the provision of bad debts; other income was 95.99 million yuan (3Q19 was 5.18 million yuan), mainly due to the increase in government subsidies; and the net interest rate of 3Q20 was 7.5%, an increase of 7.0ppt over the same period last year.
Operating cash flow improved year-on-year, while net debt ratio remained high. The net operating cash outflow of the company's 3Q20 was 39.67 million yuan, a decrease of 93.7% compared with the same period last year, mainly due to the increase in the return of project funds (the balance of accounts receivable at the end of the 3Q20 period was 9.5 billion yuan, which was lower than at the beginning of the year) and the increase in the return of dangerous and waste sales. The balance of interest-bearing liabilities continued to increase, with a net debt ratio of 98% at the end of 3Q20, up from 97% at the end of 1H20. We suggest that we continue to pay attention to the improvement of the company's endogenous cash flow and the progress of external financing such as non-public offering of preferred shares.
The risk of equity unwinding of major shareholders may continue to depress share price performance. According to the previous company announcement, 100% of the company's shares held by he Qiaonu, the company's largest shareholder, have been frozen, accounting for 32.2% of the company's total share capital, and 1.1% of the company's total share capital has been reduced since August 2019. Considering that he Qiaonu still holds a large number of shares in the company, there may continue to be passive reduction pressure in the future, which will bring downside risks to the company's stock price.
What is the biggest difference between us and the market? We are more cautious about the company's profit growth expectations.
Potential catalyst: income carry-over pressure from existing projects; continued passive reduction by major shareholders.
Profit forecast and valuation
Considering that the company's free cash flow is still under pressure, we believe that the company's short-term revenue carry-over may still face some pressure. We cut the 2020Universe net profit forecast for 2021 by 77% to 25080 million yuan. The current price of the company corresponds to 1 times 2021e Pamp B, and we reduce the target price by 16% to 4.8 yuan, corresponding to 1 times 2021e Pamp B and 2% upstream space. Downgraded to "neutral".
Risk.
The progress of the income carry-over and the cash rebate exceeded expectations.