ASIA CUANON TECHNOLOGY(SHANGHAI)(603378)：EXPENSE REDUCTION PAYS OFF;LARGE UPSIDE IN GROSS MARGIN AND DOWNSIDE IN EXPENSE RATIO

　　2022 results in line; 1Q23 results slightly beat
　　Asia Cuanon Technology (Shanghai) announced its 2022 and 1Q23 results: 2022 revenue fell 34% YoY to Rmb3.1bn and attributable net profit was Rmb106mn, in line with market expectations. In 1Q23, revenue rose 1% YoY to Rmb491mn, and attributable net profit came in at-Rmb15.96mn, slightly higher than market expectations, as the firm reduced expenses and gross margin continued to recover.
　　In 2022:
　　Falling demand from real estate sector weighs on revenue. As the firm’s business is highly related with the real estate market, sales volume of its coatings segment fell 34% YoY to 640,000t in 2022. Revenue from engineering coatings, home decoration coatings, coating supporting materials, and insulation materials declined 24%, 43%, 29%, and 49% YoY to Rmb1.77bn, Rmb133mn, Rmb282mn, and Rmb710mn. Revenue from the new waterproof material segment also fell 38% to Rmb133mn.
　　Falling raw material prices and improving product mix drive rapid recovery in gross margin. In 2022, prices of latex and titanium oxide, the firm's major raw materials, fell 6% and 5% YoY. Meanwhile, the proportion of high-GM coatings rose to 70% from 63% in 2021, driving gross margin to rise 8.4ppt YoY to 32.4%.
　　Expense reduction paying off; impairment weighs on net profit. In 2022, the firm improved efficiency and reduced headcount, with total headcount down 36% YoY. The number of sales staff fell 43% YoY, which cut expenses by 26% YoY. However, expense ratio grew 2.6ppt YoY due to weakening economies of scale. The firm charged provisions for credit impairment losses of Rmb113mn.
　　Cash flow significantly improves. Operating cash inflows totaled Rmb324mn, mainly due to a sharp rise in the cash-to-revenue ratio (+28ppt YoY to 115%).
　　Asset-to-liability ratio optimizes, which was down 3.7ppt YoY to 74%.
　　In 1Q23:
　　Revenue rose 1% YoY to Rmb491mn, with that from coatings, insulation, and waterproof materials changing -8%, +27%, and +90% YoY to Rmb340mn, Rmb98mn, and Rmb32mn.
　　Gross margin continues to improve. The prices of latex and titanium dioxide have been falling steadily, boosting the firm’s gross margin to grow 0.8ppt QoQ to 35% in 1Q23.
　　Expense ratio drops sharply. In 1Q23, expense ratio fell 7ppt YoY, with selling and R&D expense ratios down 5.6ppt and 2.1ppt YoY.
　　Cash flow continues to improve: The cash-to-revenue ratio hit 129% in 1Q23, driving operating cash flow up Rmb220mn YoY to-Rmb194mn.
　　Trends to watch
　　Efforts to reduce expenses pay off; upbeat on upside in gross margin and downside in expense ratios in 2023. We expect revenue to maintain steady growth as demand recovers in 2023. Meanwhile, we expect the firm's expense ratios to fall notably in 2023, thanks to its efforts to reduce headcount in 2022. Moreover, we expect the firm’s gross margin to continue recovering and profit margin to rise rapidly, due to its strong willingness to raise product prices.
　　Financials and valuation
　　Given slow demand recovery, we lower our 2023 revenue forecast. We raise our forecast for gross margin and lower that for expense ratios. We raise our 2023 net profit forecast 19% to Rmb253mn, and introduce our 2024 net profit forecast of Rmb363mn. The stock is trading at 17x 2023e and 12x 2024e P/E. We keep our earnings forecast unchanged. We lift our target price 44% to Rmb13, implying 22.0x 2023e and 15.5x 2024e P/E with 32% upside, given sector recovery and the firm's efforts to reduce expenses.
　　Risks
　　Disappointing demand recovery and/or revenue contribution from distribution channels; intensifying competition.
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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。