ORIENTAL YUHONG WATERPROOF(002271)：CIVIL CONSTRUCTION MATERIALS SURGE DESPITE HEADWINDS;EXPECT EARNINGS UPSIDE IN 2023

　　2022 results in line with our expectations
　　Oriental Yuhong Waterproof announced 2022 results: Revenue fell 2.3% YoY to Rmb31.2bn and attributable net profit declined 50% YoY to Rmb2.12bn. In 4Q22, revenue slid 15% YoY to Rmb7.84bn, and attributable net profit fell 70% YoY to Rmb465mn, largely in line with market expectations.
　　Revenue remained solid; civil construction business surged despite headwinds. The firm’s revenue edged down in 2022. Revenue from waterproof membranes declined 20% YoY, mainly dragged by the falling demand in the real estate industry. Revenue from coatings and construction increased 17% and 24% YoY. Revenue from the retail business rose 58% YoY to Rmb6.1bn due to the firm’s efforts to attract individual customers.
　　GM came under pressure in 2022 but slightly recovered in 4Q22. In 2022, the ASP of asphalt (representing 25-30% of total cost) rose 30% YoY to Rmb4,200/t, pushing GM down 5ppt YoY to 25.8%. GM of waterproof membranes, coatings, and construction slid 5.8ppt, 4.1ppt, and 4.9ppt YoY to 25%, 30%, and 24%. In 4Q22, GM rose 1.7ppt QoQ to 25.6% due to falling asphalt prices.
　　High selling expense ratio in 4Q22; booked more-than-expected reversal of impairment losses. The firm’s selling and G&A expense ratios rose 1.6ppt and 0.6ppt YoY to 8.5% and 5.8% in 2022. In 4Q22, selling expenses grew about Rmb300mn QoQ to Rmb858mn, mainly on severance costs and year-end bonuses. The number of employees fell 8% YoY in 2022. We expect the firm to further reduce expenses and enhance efficiency in 2023. The firm collected a net value of Rmb5bn receivables in 4Q22 and reversed Rmb315mn of impairment losses, beating market expectations.
　　Abundant payment collection in 4Q22; full-year cash flow pressured but slightly beat expectations. In 2022, receivables turnover rose 14 days YoY to 133 days. The cash-to-revenue ratio fell 7ppt YoY to 105%. Net operating cash flow fell Rmb3.5bn or 84% YoY to Rmb654mn, slightly beating market expectations. In 4Q22, the firm stepped up payment collection efforts, with the cash-to-revenue ratio rising 159% YoY and net operating cash flow up Rmb8.6bn(-Rmb1.8bn YoY).
　　Trends to watch
　　Built healthy channel ecosystem for retail segment; expansion continues. In 2022, the firm’s civil construction material subsidiary targeted core resources and made additional efforts to develop distributors. It now has 4,000 distributors, over 100,000 distribution stores, more than 20,000 outlets, and over 2mn memberships. The firm has built a robust distribution channel ecosystem. We are upbeat on the rapid expansion of its primary material products and the penetration rate of new products via civil construction channels, buttressing ongoing high growth for the subsidiary in 2023.
　　Restarts construction channel reform. In 2022, the firm’s engineering construction material subsidiary saw sluggish growth due to falling demand, but its market presence slightly increased and the number of partners also saw marked growth, laying the foundation for its expansion in regional markets in 2023. The firm said it will prioritize the benefit of partners and promised not to compete for business or market share with them. In addition, the company cultivated many partners in lower-tier markets and specialized sectors. We anticipate steady revenue growth for its engineering construction material subsidiary in 2023.
　　Financials and valuation
　　We keep our 2023 earnings forecast unchanged and introduce a net profit forecast of Rmb5.4bn in 2024. The stock is trading at 20x 2023e and 16x 2024e P/E. Given the recovery of the real estate market, we maintain OUTPERFORM and raise our target price by 29% to Rmb45, implying 26x 2023e and 21x 2024e P/E, offering 31% upside.
　　Risks
　　Demand recovery disappoints; high raw material prices persist longer than expected; disappointing expansion of non-real estate business.
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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。