Incident: Mona Lisa released its quarterly report for 2024. From January to September '24, the company achieved revenue/net profit attributable to mothers/net profit without return to mother was 3.57/0.14/0.12 billion yuan, respectively, -21.4%/-57.9%/-63.8% compared with the same period last year. The company achieved revenue/ net profit attributable to mothers/ net profit after deducting non-return to mother in the third quarter of the year, respectively, of 1.24/0.06/0.05 billion yuan, -24.3%/-65.7%/-68.7% compared with the same period last year.

Comment:

Revenue and profit have declined, and the share of distribution revenue has increased: due to the continued downturn in real estate, demand in the construction pottery market is still weak, competition is further intensifying, and the company's revenue and profit side is still under downward pressure. By business, the company continued to make efforts to expand the distribution business, shrinking the high-risk engineering strategy business. The year-on-year decline in distribution business was relatively small. From January to September '24, the company achieved sales business/engineering strategy revenue of 2.7/0.87 billion yuan, a year-on-year decrease of 6.8%/47.1%, accounting for 75.6% and 24.4%, respectively. The share of the distribution business increased by 11.9 pcts year on year.

Gross margin declined year on year, maintaining good cash flow from operating activities: or due to declining sales prices and fixed cost rigidity due to increased competition, 24Q3 company gross margin declined year on year. The increase in the cost ratio, especially the management fee ratio, during the period, caused the company's net interest rate to decline higher than the gross profit margin. In 24Q3, the company's gross and net sales margin was 27.6%/4.0%, down 2.0/4.2pcts year-on-year. The cost ratio increased 2.4 pcts to 21.2% year over year during the 24Q3 period. Among them, the sales/management/finance/R&D expenses ratio was 6.2%/9.6%/1.7%/3.8%, -0.5/+2.3/+0.2/+0.3 pcts year over year.

The 24Q3 company's net operating cash flow was 0.52 billion yuan, an increase of 0.04 billion yuan over the same period last year. During the year, the company optimized its inventory structure, strengthened procurement cost reduction management, and strengthened receivables management, and maintained good cash flow under downward revenue pressure.

Favorable policies continue to be introduced, and industry leaders can be expected to restore flexibility: real estate policies continued to be optimized during the year, and the September 26 Politburo meeting emphasized the need to stop the decline and stabilize the real estate market and introduce policy packages to boost market confidence. According to the China Index, overall property market transactions rose sequentially in October, with the transaction area of 22 cities including Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Wuhan, Suzhou, Dongguan, Ningbo, and Nanning rising 23.8% month-on-month. Among them, first-tier cities saw the biggest increase of 45.69%. As property market transactions pick up, the real estate chain is expected to be gradually repaired, leading to a rise in completion. As a leader in the industry, the company has strong technical strength and stable channel resources, and continues to expand its market share. Performance recovery and flexibility can be expected.

Profit forecast, valuation and rating: The continued downturn in the real estate market in the first three quarters of 24 years affected the demand in the construction industry. Currently, the company's revenue and profit are still under significant pressure. Considering that market repair and policy transmission will take some time, we lowered the 24-26 net profit forecast to 0.21/0.26/0.36 billion yuan (48%/50%/40% reduction, respectively). As an industry leader, the company can expect flexible performance recovery and maintain a “buy” rating.

Risk warning: The completion and restoration of real estate fell short of expectations; the price of crude fuel materials rose more than expected.