Incident: China Liansu announced its 2023 results. The company achieved operating revenue of 31 billion yuan in 2023, an increase of 0.4%, and realized net profit of 2.4 billion yuan to mother, a decrease of 5.9%.
Although revenue from the company's main products declined, sales volume and gross margin increased. In 2023, real estate investment is still under heavy pressure, but government-led infrastructure investment continues to gain strength. In particular, the growth rate of investment in water conservancy construction remains at a good level, which supports the demand for related pipelines. During the reporting period, the company's total product sales volume was 2.65 million tons, an increase of 10.6% over the same period. The average price of plastic piping systems was 9,289 yuan/ton, down 13.2% from the same period. The water supply business achieved revenue of 9.4 billion yuan, a decrease of 5.5%; the drainage business achieved revenue of 9.2 billion yuan, a decrease of 5.2%; electricity supply and communications achieved revenue of 3.7 billion yuan, a decrease of 11.2%; and revenue from gas transportation of 500 million yuan, an increase of 10.5%. However, benefiting from the decline in the prices of raw materials such as PVC, the gross margin of plastic piping systems also increased by 1 pct to 28.5%.
Infrastructure demand will continue to be supported in 2024, and performance is expected to remain stable overall. In 2024, infrastructure investment will continue to be the main driving force for steady economic growth, and the additional issuance of trillion special treasury bonds will also form a physical workload. The company is also actively strengthening cooperation with government departments and leading infrastructure central state-owned enterprises, investing in national engineering and municipal renovation projects, making full use of infrastructure development opportunities and expanding the plastic piping system business. Furthermore, the company continues to build a diversified brand ecosystem and develop building materials, home, environmental protection, and new energy businesses, which is expected to gradually become a new growth point for the Group's future revenue.
We forecast the company's EPS for 2023-2025 to be 0.76/0.73/0.77 yuan (the original forecast for 23-25 was 1.02/1.20/1.39 yuan). Refer to the valuation level of comparable companies as 6X PE in 2024. Considering that the company's new businesses such as solar energy and supply chain services still have significant capital expenses, we discounted the company 15% valuation to 5XPE in 2024. The target price is HK$3.97 (HKD1 = RMB0.92), maintaining the “Buy” rating.
Risk warning
Real estate demand fell short of expectations, cash flow deteriorated due to the expansion of municipal business, and the risk of excessive investment in professional market platform businesses