ORIENTAL YUHONG WATERPROOF(002271)：LAUNCHES NEW STOCK INCENTIVE PLAN TO BUILD CONFIDENCE AND BOOST GROWTH

　　What's new
　　Oriental Yuhong Waterproof (Oriental Yuhong) released a new restricted stock incentive plan, in which recurring net profit (excluding equity incentive expenses) minimums will be Rmb2.7bn in 2023, Rmb3.24bn in 2024, Rmb3.89bn in 2025, Rmb4.67bn in 2026, and Rmb5.60bn in 2027.
　　Comments
　　New restricted stock incentive plan to boost long-term growth. Oriental Yuhong’s restricted stock incentive plan covers 7,266 core employees. It plans to grant 80.87mn shares (representing 3.2% of the firm's total share capital), of which 27.87mn shares will come from the firm’s share buybacks, with the remainder issued via private placement at a price of Rmb13.86/sh (about 48% discount from the current share price).
　　Requirements of the incentive plan are twofold. First, based on 2022 performance, recurring net profit (excluding equity incentive expenses) must grow at least 50% to a minimum of Rmb2.7bn in 2023, at least 80% to a minimum of Rmb3.24bn in 2024, at least 116% to a minimum of Rmb3.89bn in 2025, at least 159% to a minimum of Rmb4.67bn in 2026, and at least 211% to a minimum of Rmb5.60bn in 2027, implying a CAGR of 20% over 2024-2027 (vs. profit target for 2023). Second, the firm's accounts receivable should not grow faster than its revenue. We believe these two assessment targets demonstrate the firm's confidence in its long-term growth.
　　Building confidence to boost growth. In our view, the firm’s 2023 performance assessment requirements in the stock incentive plan are relatively modest based on a low base in 2022. However, the CAGR of 20% over 2024-2027 is challenging amid a downturn in the real estate sector and insufficient momentum of infrastructure construction. We think the firm needs to work hard to achieve its goals.
　　We believe the relatively low assessment requirements and the low grant price under the incentive plan in 2023 will likely help Oriental Yuhong regain confidence, encourage its sales team and distributors. We expect the firm to have larger market shares and resume rapid growth. In addition, we foresee sustained growth of the firm driven by the relatively high long-term CAGR target.
　　Demand under pressure; rising market share shows long-term competitiveness. Looking ahead, we believe demand for waterproof materials will remain under pressure due to sluggish housing sales and funding problems related to land acquisition, new-starts and municipal infrastructure construction. In addition, competition in the existing market may intensify and profit margin recovery may decelerate.
　　However, we believe the firm has shifted its growth drivers to a certain extent, shifting focus from centralized real estate procurement to integrated companies and civil construction channels. Furthermore, we believe the firm’s high-quality channel operations and product upgrades should bolster its high-quality development.
　　Financials and valuation
　　Given continued pressure on demand and increasing equity incentive expenses, we cut our 2023 and 2024 EPS forecasts by 16% to Rmb1.45 and by 15% to Rmb1.82. The stock is trading at 20x and 16x 2023e and 2024e P/E. We maintain an OUTPERFORM rating, but we cut our target price 16% to Rmb38 (implying 26x and 21x 2023e and 2024e P/E), with 33% upside.
　　Risks
　　Demand recovery and/or infrastructure business expansion disappoint; market competition intensifies.
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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。