CHINA DESIGN GROUP(603018)：REVENUE GROWS STEADILY;EXPANSION INTO NEW INDUSTRIES CONTINUES

1-3Q22 results in line with our forecast
China Design Group announced its 1-3Q22 results: Revenue increased 7.3% YoY to Rmb3.3bn in 1-3Q22 and attributable net profit rose 11.9% YoY to Rmb347.4mn. In 3Q22, revenue rose 8.6% YoY to Rmb983.8mn and attributable net profit increased 16.8% YoY to Rmb88.8mn. The firm’s results are in line with our expectations.
Gross margin fell 1.0ppt YoY to 31.8% in 3Q22. In 3Q22, the overall expense ratio rose 0.4ppt YoY to 17.6%, with selling, G&A, and financial expense ratios down 0.5ppt, 0.9ppt, and 0.1ppt YoY, while R&D expense ratio rose 1.5ppt YoY. In 3Q22, asset and credit impairment losses declined 18% YoY to Rmb38.17mn. In 3Q22, net margin rose 0.6ppt YoY to 9.0%. Net operating cash outflows came to Rmb67.40mn in 3Q22; investment cash outflows reached Rmb37.16mn, while investment cash inflows were recorded one year ago.
Trends to watch
Revenue was in steady growth; we suggest watching order and revenue growth. The firm’s revenue grew 8.6% YoY in 3Q22, up slightly from 2.4% in 2Q22 but down from 14.1% in 1Q22, which we believe indicates the firm’s project implementation recovered in 3Q22, but the recovery momentum was moderate. Looking ahead, the firm’s newly-acquired orders increased 4.4% YoY in 2021, with new design and construction orders up 2.1% and 9.6% YoY. We believe the firm’s order backlog remains strong, and suggest watching revenue recognition amid continuous project delivery, and potential growth in newly-acquired orders driven by rise in infrastructure demand.
Proceeds from issuance of convertible bonds to support construction of innovation projects. On September 15, China Design announced it plans to issue no more than Rmb400mn of A-share convertible bonds, and proceeds from the issuance will be used to fund the construction of China Design Innovation Center. In recent years, the firm made continuous efforts to accelerate expansion into new industries. It has been investing in infrastructure digitalization, big data R&D and application, green and low-carbon energy, vehicle-road (ship-shore) coordination, and autonomous driving with innovation research institutes at the core, and digitalization, intelligentization, and green and low-carbon as main directions. We believe the firm’s move to use the funds to support innovation construction reflects its long-term vision for new industries. We suggest watching new businesses’ contribution to revenue and earnings.
Supporting ESOP or equity incentives via share buybacks. In April, the board of directors approved the firm’s plan to buy back shares with proprietary and self-raised funds in the mode of centralized trading to fund its employee stock ownership plan (ESOP) or equity incentives. It plans to buy back shares at no more than Rmb11.0/sh for a total of Rmb30-60mn. As of October 24, China Design already bought back 3.6mn shares for Rmb30.16mn. In recent years, the firm launched schemes to galvanize employees, which we believe reflects improvement in its governance structure, boding well for its healthy growth over the long run.
Financials and valuation
We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 7.4x 2022 and 6.5x 2023 P/E. We maintain OUTPERFORM and our TP of Rmb9.40 (9.0x 2022 P/E and 8.0x 2023 P/E), offering 22% upside from the current price.
Risks
Disappointing progress of new projects and/or order acquisition.
【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。