1H23 performed better than we expected
The company announced 1H23 results: revenue +2.7% year on year to 15.30 billion yuan; net profit to parent +15% to 1.49 billion yuan, higher than our expectations, mainly due to gross margin exceeding expectations.
Pipeline, the main business, contributed to profits, and emerging businesses rose steadily. 1) Plastic pipe sales volume shows toughness:
1H23 plastic pipe sales volume was +14% to 1.27 million tons, of which PVC/non-PVC was +13%/+17% to 94/340,000 tons. At the same time, due to a sharp drop in raw material prices, the company lowered the sales price. The average sales price of 1H23 pipe was -16% to 9,596 yuan/ton (of which the average price of PVC/non-PVC was -21%/-8%), bringing total plastic pipe revenue -4.2% to 12.23 billion yuan; 2) Project transformation and channel improvement: Considering the decline in real estate business, the company actively changed its pipeline customer base to central China Enterprise, urban investment, urban construction, agricultural transformation and expansion, 1H23 water supply/drainage/power communication/gas/other types of pipeline revenue was -2.7%/-7.6%/-13.4%/+18.6%/+36.2% to 48.5/44.6/18.6/2.37/828 million yuan, and the number of dealers +100 to 2806 million yuan); 3) Other products grew steadily: 1H23's building materials home/environmental/overseas shopping mall revenue was +10%/22%/20% to 13.4/1.75.79 billion yuan, At the same time, the photovoltaic sector rapidly expanded to 739 million yuan. 4) Raw materials declined, and gross margin was restored: 1H23 raw materials such as PVC/PPR/PE all had a large year-on-year decline, bringing pipe gross margin +3.6 ppt to 30% year on year, but gross profit per ton was -133 yuan/ton year on year. The 1H comprehensive gross margin was +1.4ppt to 27.8% year over year, driving gross profit +8% year on year to 4.26 billion yuan.
Expenses have risen slightly, and debt ratios have risen. 1) 1H23's sales/management/other expenses were +9.7%/-28%, respectively, resulting in profit before interest and tax +31% to 2.44 billion yuan; 2) The company's accounts receivable days were +3 to 59 days, and the number of accounts payable days was +11 to 140 days; 3) 1H23's total debt was +2.7 billion yuan to 22.8 billion yuan, while cash on hand remained basically unchanged. The corresponding net debt ratio rose by 10ppt to 66.8%, mainly due to the company's increase in capital expenses and capital support for new business.
Development trends
The main business has shown resilience and is awaiting a gradual recovery in demand. Looking ahead to the second half of the year, we believe demand is still recovering slowly, but through channel advantages, cost advantages, and diversified product exploration, the company's main business pipeline has still achieved good profit stability, supporting a steady upward trend in profits. If demand for real estate and municipal administration gradually recovers in the future, the company is expected to achieve a gradual increase in revenue and profit growth. Currently, the company's dividend rate has reached 30%, the valuation is only 4x P/E, and the dividend rate is generous.
Profit forecasting and valuation
Due to weak demand, we lowered our 23/24 net profit by 15%/17% to 30.36 billion yuan. The current stock price corresponds to 23/24e 4x/3.4x P/E. We maintained our outperforming industry rating. Due to the high risk appetite in the Hong Kong stock market, we lowered our target price by 45% to HK$5.5, corresponding to 22e/23e 5.1x/4.3x P/E, implying 28% upside.
risks
Downstream demand fell short of expectations, and multi-business expansion fell short of expectations.