KINLONG HARDWARE PRODUCTS(002791)：CASH FLOW IMPROVES FURTHER;AWAITING INFLECTION POINT AMID HIGH REVENUE GROWTH

　　2022 and 1Q23 in line with market expectations
　　Kinlong Hardware Products announced its 2022 and 1Q23 results: In 2022, revenue fell 13% YoY to Rmb7.65bn, and attributable net profit declined 93% YoY to Rmb65.56mn, in line with market expectations. In 1Q23, revenue rose 4.8% YoY to Rmb1.35bn and attributable net loss was Rmb56.05mn, in line with market expectations.
　　2022 review
　　Traditional products came under pressure amid real estate market downturn; new categories remain resilient. Due to the downtrend in the real estate market, revenue from the firm’s door and window hardware products fell 15% YoY to Rmb3.56bn, while that from other door and window products (e.g., door control hardware and relevant accessories) fell 20% YoY to Rmb1.7bn. Revenue from household products and other architectural hardware products fell 5% and 5% YoY to around Rmb1.37bn and Rmb936mn, with their combined revenue contribution rising 2ppt to 30%.
　　Rising raw material prices weighed on GM. Prices of aluminum alloy, stainless steel, and zinc alloy (major raw materials) rose 8%, 30%, and 16% YoY in 2022. As a result, the blended GM fell 5ppt YoY to 30.2% (taxes and surcharges not excluded, the same below). Specifically, GM of door and window hardware was down 4.1ppt YoY, and that of door control and curtain wall components declined 3.5ppt and 6.3ppt YoY. GM of new product categories also came under pressure, down 8.3ppt YoY. GM of household products fell 5.2ppt YoY, mainly due to the 18% decline in the revenue at HBS Intelligent Technology, Kinlong’s subsidiary.
　　Expense ratio continued to decline: Selling, G&A, and R&D expense ratios fell 1.2ppt, 0.3ppt, and 0.5ppt YoY. Fixed expenses weighed heavily on net margin. The firm’s expenses rose 11% YoY and the expense ratio grew 5.7ppt YoY to 26.1%, dragging net margin down 9.2ppt to 0.9%.
　　Healthy cash flow. Accounts receivable fell Rmb144mn YoY. Accounts payable rose Rmb338mn YoY. The ratio of cash received from sales of goods to revenue rose 18ppt YoY to 100%, and net operating cash flow rose 71% YoY to Rmb935mn.
　　1Q23 review
　　Revenue edged up 5% YoY in 1Q23 amid weak recovery in real estate demand. Prices of aluminum alloy, stainless steel, and zinc alloys fell 16%, 9%, and 8% YoY, pushing the firm’s 1Q23 GM up 1.3ppt YoY to 30.1%. Expense ratio fell 2.1ppt YoY to 32.4% thanks to a slight increase in revenue and effective headcount control. The ratio of cash received from sales of goods to revenue rose 13ppt to 118%, driving net operating cash flow up Rmb337mn YoY to -Rmb359mn.
　　Trends to watch
　　Weak demand recovery driven by policies to ensure delivery of property projects; foresee a potential strong turnaround after revenue growth accelerates. In 2023, we expect market demand will gradually recover, driven by policies to ensure the delivery of property projects. In addition, if the firm’s sales activities proceed smoothly and new consumption scenarios gradually come online, we think the firm’s revenue could resume high growth, ushering in a strong inflection point with improving labor efficiency and rapid profit growth.
　　Financials and valuation
　　Given weak demand recovery, we lower our 2023 and 2024 revenue and expense ratio forecasts. We maintain our 2023 earnings forecast but cut our 2024e EPS forecast 7% to Rmb3. The stock is trading at 38x 2023e and 23x 2024e P/E. We maintain OUTPERFORM. Considering weaker stimulus from real-estate-related policies, we cut our target price 23% to Rmb85, implying 47x 2023e and 28x 2024e P/E, implying 22% upside.
　　Risks
　　Disappointing recovery of demand from housing completions and/or improvement in employee efficiency; market expansion falls short of expectations.
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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。