ORIENTAL YUHONG WATERPROOF(002271)：3Q22 RESULTS UNDER PRESSURE;NEW STANDARDS LIKELY TO ACCELERATE BUSINESS INTEGRATION

　　3Q22 results in line with our expectations
　　Oriental Yuhong Waterproof (Yuhong) announced that its revenue rose 3% YoY to Rmb23.4bn and attributable net profit dropped 38% YoY to Rmb1.65bn in 1-3Q22. In 3Q22, revenue fell 4.5% YoY to Rmb8.07bn and attributable net profit dropped 40% YoY to Rmb688mn, largely in line with our expectations and consensus.
　　Revenue growth still faced pressure. The firm’s revenue dropped 4.5% YoY in 3Q22 due to weak home sales and lackluster infrastructure construction amid COVID-19 resurgence and capital pressure of real estate developers. QoQ growth rate of the firm’s revenue in 3Q22 was also negative. GM dropped. In 3Q22, asphalt prices remained high and the procurement period was long. As a result, gross margin (GM) fell 2.1ppt QoQ and 5.1ppt YoY to 23.8% in 3Q22. Net interest margin improved QoQ due to effective expense control. Due to economic growth pressure, the firm significantly cut expenses. In 3Q22, its operational expense and G&A expense dropped 6.7% and 4.4% YoY to Rmb549mn and Rmb394mn. Overall expense ratio edged down 0.3ppt QoQ (+0.3ppt YoY) to 14.2%. In 3Q22, credit impairment losses narrowed by Rmb233mn QoQ, and other income trended up Rmb76mn QoQ. As a result, its net margin increased 1.3ppt QoQ to 8.5% in 3Q22.
　　Growth of accounts receivable slowed. In 3Q22, accounts receivable increased Rmb1.59bn QoQ to Rmb16.34bn, equaling around 70% of total revenue (+13ppt YoY). Accounts payable increased Rmb0.9bn QoQ to Rmb6.9bn in 3Q22. Operating cash flow turned around. Net operating cash flow decreased Rmb1.68bn to -Rmb7.96bn over 1-3Q22. In 3Q22, the firm’s net operating cash flow increased Rmb1.8bn YoY to -Rmb982mn. Capex remained high. Its capex stood at Rmb4.16bn over 1-3Q22 and at Rmb1.34bn in 3Q22.
　　Trends to watch
　　New standards to help improve quality of waterproofing; the market likely to expand; elimination of non-standardized products to accelerate. The Ministry of Housing and Urban-Rural Development issued a new waterproof regulation, increasing requirements on warranty period (previous warranty period requirement is five years) and the number of layers of waterproof products. We expect the market to expand over 30% in the medium term after the release of the new standards. In addition, the new regulations specify the performance requirements of waterproof materials, and add mandatory requirements on project acceptance before delivery. In our opinion, this significantly reduces the market for non-standardized products and is conducive to the firm’s expansion in non-housing markets.
　　Integrated services improved; localized operations generate additional earnings. Under the new standards, we expect the firm to accelerate its entry into local governments’ procurement lists and provide localized products via its branches in different provinces. We expect it to benefit from the new standards and to take market share from small companies.
　　Financials and valuation
　　We cut our EPS forecast 28% to Rmb1.13 in 2022 and 23% to Rmb1.72 in 2023 to reflect the impacts of weak home sales and lackluster infrastructure construction. The stock is trading at 22x 2022e and 14x 2023e P/E. We maintain OUTPERFORM and cut our TP 30% to Rmb35, implying 31x 2022e and 20x 2023e P/E with 43% 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。