ORIENTAL YUHONG WATERPROOF(002271)：HIGHER EXPENSES AND RAW MATERIAL COST DRAG 1H22 PROFIT;LONG-TERM MOMENTUM INTACT

1H22 results missed our expectations and consensus
Oriental Yuhong Waterproof (Yuhong) announced 1H22 results. Revenue rose 7.6% YoY in 1H22 and 1.7% YoY in 2Q22 to Rmb15.31bn and Rmb9bn, while attributable net profit dropped 37% and 47.7% YoY to Rmb966mn and Rmb649mn, missing our expectations and consensus on higher expenses and higher-than-expected credit impairment.
Weak home sales dragged construction revenue, and civil construction business rapidly expanded. In 1H22, revenue from waterproof rolls and construction rose merely 1% and 0.7% YoY to Rmb7.1bn and Rmb1.4bn due to weak home sales and COVID-19 resurgence. Civil construction revenue surged around 80% YoY, driving up waterproof coatings revenue by 20% YoY to Rmb5.57bn in 1H22. Higher raw material cost weighed on gross margin. Gross margin shrank 4.7ppt YoY to 26.9% in 1H22, and declined 5ppt YoY or 2.3ppt QoQ to 25.9% in 2Q22, mainly because gross margins of the waterproof rolls and coatings businesses fell 5.8ppt and 4.6ppt YoY to 27% and 30% caused by higher pitch cost. Higher expenses squeezed profit. In 1H22, selling and G&A expense ratios picked up 0.7ppt and 0.6ppt to 8.2% and 6.1%, mainly due to heftier discounts and increases in labor cost and equity incentive expense. Total expense in 1H22 climbed 16.3% YoY to Rmb2.5bn. In 1H22, Yuhong cumulatively charged provision for Rmb517mn of credit impairment (vs. Rmb467mn in 1H21).
Tightening of funding conditions and prolonging of payment collection period. Receivables days in 1H22 increased 27 days YoY to 127 days, driving up receivables at end-1H22 by Rmb4.2bn vs. the beginning of 2022 to Rmb13bn. Cash flows declined. Net operating cash flow in 1H22 decreased Rmb3.5bn YoY to -Rmb7bn, with revenue to cash receipts ratio falling 3ppt YoY in 1H22 and 8ppt YoY in 2Q22 to 85% and 68%. Fixed asset investment in 1H22 increased Rmb1.1bn YoY to Rmb2.82bn, and we think it may start to slow in 2H22 as the firm announced that most projects are almost completed.
Trends to watch
Exiting of small and medium-sized rivals to accelerate; Yuhong seeks to expand market share via channel expansion. We believe property developers may slow land acquisitions and new project launches due to weak home sales and tight funding. However, most small to medium-sized waterproof material companies have remained loss-making due to business scale-down and profit pressure from the increase in raw material cost. We expect these firms to exit the market more rapidly if the sector downtrend continues. Moreover, we are upbeat on Yuhong’s continued expansion of channels such as civil construction and its entry into the non-housing and retail market. We think Yuhong may continue to expand market share in the waterproof market and become an integrated building material services provider, boding well for its long-term growth.
Financials and valuation
Given the housing market downturn, we lower our revenue and gross margin forecasts, and revise down our 2022 and 2023 EPS forecasts by 26% and 18% to Rmb1.57 and Rmb2.22. The stock now trades at 22x 2022e and 16x 2023e P/E. We maintain OUTPERFORM and cut TP by 20% to Rmb50, implying 32x 2022e and 23x 2023e P/E, offering 42% upside.
Risks
Demand recovery and non-housing business expansion disappoint; raw material cost rises more than expected.
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   【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。