SOBUTE NEW MATERIALS(603916)：1Q23 RESULTS IN LINE;UPBEAT ON DEMAND RECOVERY AND EARNINGS UPSIDE

　　1Q23 results in line with our expectations
　　Sobute New Materials announced 1Q23 results: Revenue fell 7.1% YoY to Rmb666mn, net profit attributable to shareholders fell 49.6% YoY to Rmb40.42mn, and recurring net profit attributable to shareholders declined 47.6% YoY to Rmb39.25mn. The firm's 1Q23 results are in line with our expectations.
　　Water-reducing admixtures: Sales volume decline and revenue decline narrowed notably amid demand recovery; ASP fell slightly. In 1Q23, sales volume of high-performance water-reducing admixtures fell 4.9% YoY to 188,300t, and revenue slid 12.7% YoY to Rmb376mn, with the YoY sales volume decline and revenue decline narrowing markedly from 27% and 32% in 4Q22. In 1Q23, the ASP of the firm's high-performance water-reducing admixtures was Rmb1,994/t, slightly down 8.2% YoY (or 2.9% QoQ).
　　Demand for functional materials recovered faster; ASP returned to a historically high level. In 1Q23, sales volume of functional materials stayed flat YoY at 45,800t. ASP rose 2.3% YoY (or 42.1% QoQ) to Rmb2,121/t, returning to a historically high level. As a result, revenue from functional materials was the first among the firm’s other products to achieve positive growth, rising 2.3% YoY in 1Q23.
　　GM rebounded QoQ; YoY decline narrowed. In 1Q23, the firm’s blended GM rose 2.1ppt QoQ but fell 2.8ppt YoY to 35.7%, with the YoY decline narrowing from 4ppt in 4Q22.
　　Effective expense control. In 1Q23, the firm's selling and R&D expense ratio fell 1.2ppt and 0.6ppt YoY while its G&A expense ratio rose 0.9ppt YoY, and its financial expense ratio remained largely flat. Overall, the firm’s blended expense ratio fell 1ppt YoY in 1Q23, showing YoY improvement.
　　Cash flow strong. The firm's net operating cash flow reached Rmb122mn in 1Q23 (vs. -Rmb41mn in 1Q22), indicating strong payment collection in 1Q23.
　　Trends to watch
　　We expect demand recovery and infrastructure construction to boost the firm’s sales volume; upbeat on full-year earnings upside. Infrastructure customers account for about 40% of the firm’s revenue. In 2022, the firm’s admixture production and sales were affected by insufficient infrastructure construction. We expect demand for the firm’s admixture products to recover in 2023 as disruptions to infrastructure construction subside and funding pressure eases.
　　Meanwhile, we expect the firm’s high-GM functional material products (such as transportation materials and anti-cracking materials that are mainly used in infrastructure projects) to benefit markedly from accelerated infrastructure construction. Functional materials accounted for 20% of the firm’s revenue in 1Q23, up 1ppt YoY. We are optimistic about sales and earnings growth of the firm’s functional materials, and expect the contribution to the firm’s revenue and profit to continue rising. We see substantial upside potential in the firm’s earnings, driven by recovering GM and falling expense ratio, if the firm’s sales volume recovers YoY and raw material prices remain stable in 2023.
　　Financials and valuation
　　We maintain our 2023 and 2024 attributable net profit forecasts at Rmb440mn and Rmb540mn. The stock is trading at 13.7x 2023e and 11.3x 2024e P/E. We maintain OUTPERFORM and our TP at Rmb21.0, implying 20.0x 2023e and 16.4x 2024e P/E with 45.3% upside.
　　Risks
　　Disappointing recovery in demand; sharper-than-expected raw material price hikes.
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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。