KINLONG HARDWARE PRODUCTS(002791)：1H22 RESULTS IN LINE WITH PREANNOUNCEMENT;INCREASING INVESTMENT DESPITE INDUSTRY DOWNTURN

1H22 results in line with preannouncement
Kinlong Hardware Products (Kinlong) announced its 1H22 results: Revenue fell 6.8% YoY to Rmb3.25bn; attributable net profit declined 122% YoY to -Rmb85.29mn. In 2Q22, revenue slid 12.8% YoY to Rmb1.96bn; attributable net profit reached Rmb4.15mn. The firm’s 1H22 results are in line with its preannouncement.
1) Growth of new and existing categories diverged; revenue growth pressured by real estate downturn. In 1H22, Kinlong’s revenue from door and window hardware categories (including doors and windows, gating hardware, accessories, curtain walls and stainless steel) fell 15.7% YoY to Rmb2.28bn. Among new product categories, revenue from household products grew only 5.7% YoY to Rmb532mn due to weak demand from well-decorated housing. However, revenue from other building hardware products maintained rapid growth, rising 66.7% YoY to Rmb393mn. 2) Raw material price hikes and decelerated revenue growth weighed on GM. In 1H22, ASP of stainless steel, aluminum alloy, and zinc alloy rose 21%, 8% and 16% HoH compared to 2H21 due to the Russia-Ukraine conflict. This, coupled with decelerated revenue from all product categories (e.g., revenue of HBS Intelligent Technology, Kinlong’s subsidiary, dropped 30% YoY in 1H22), weighed on the firm’s GM. Specifically, GM of door and window hardware products fell 3.4ppt YoY to 37.6%; GM of household products slid 12ppt YoY to 24.3%; and GM of other building hardware products decreased 19.8ppt YoY to 11.9%. Kinlong’s blended GM dropped 8.5ppt YoY to 28.8% in 1H22 and remained largely flat QoQ in 2Q22. 3) Expense ratios remained under pressure. Selling and G amp;A expenses rose 24.4% and 15.9% YoY in 2Q22 due to workforce expansion in 1H22 (number of employees increased by nearly 20%). Selling and G amp;A expense ratios grew 4.7ppt and 1.2ppt YoY in 1H22 amid slowing revenue growth.
1) Ratio of cash from sales of goods to revenue improved; accounts payable stable. In 1H22, the ratio of cash received from sales of goods to revenue rose 20ppt YoY to 102%. However, the ratio of cash paid for the purchase of goods and services to cost of goods sold rose 18ppt YoY to 88% mainly because payables (e.g., accounts payable, employee compensation payable and taxes payable) decreased by Rmb578mn HoH compared to end-2021, and net operating cash flow declined Rmb97mn YoY to -Rmb645mn in 1H22. 2) Investment and capex increased amid industry downturn. We note the firm’s cash flow from investing activities expanded in 1H22. The firm collaborated with high-quality brands and acquired stakes in four companies for Rmb170mn in total. Meanwhile, it ramped up investment in expanding distribution channels, and building information systems. The number of employees likely increased by more than 20% YoY. We believe the above-mentioned moves reflect the firm’s confidence in business expansion despite current industry downturn. 3) Financials solid despite rising interest-bearing liabilities. In 1H22, the firm’s interest-bearing liabilities increased by Rmb369mn HoH compared to end-2021. However, its net cash flow remained solid.
Trends to watch
Increasing investment despite industry downturn; earnings likely to rebound as industry fundamentals recover. In 1H22, Kinlong stepped up investment in staff recruitment, construction of information systems and expansion of distribution channels and product categories, driving up expenses and putting its profit under pressure. However, we expect its investment to gradually pay off as fundamentals of the industry improve, contributing incremental revenue and profit to the firm.
Financials and valuation
Considering the real estate industry downturn, we lower our revenue and profit forecasts. We revise our 2022 and 2023 EPS forecasts down by 52% and 33% to Rmb1.6 and Rmb3.1. The stock is trading at 53x 2022e and 27x 2023e P/E. We maintain an OUTPERFORM rating and cut our TP 33% to Rmb110, implying 32x 2023e P/E with 34% upside.
Risks
Disappointing recovery of demand from housing completions and/or improvement in employee efficiency; market expansion falls short of expectations.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。