ORIENTAL YUHONG WATERPROOF(002271)：PROFIT RECOVERS RAPIDLY IN 1H23; UPBEAT ON STEADY GROWTH IN 2023

　　Preannounced 1H23 net profit up 35-45% YoY
　　Oriental Yuhong Waterproof （Oriental Yuhong） preannounced its 1H23 results: Net profit attributable to shareholders may rise 35-45% YoY to Rmb1.3-1.4bn. In 2Q23, the firm’s attributable net profit may total Rmb920-1.02bn （up 42-57% YoY）， with the median reaching an estimated Rmb965mn （up 49% YoY）。
　　In 1H23, Oriental Yuhong’s recurring net profit may rise 35-45% YoY to Rmb1.2-1.29bn. In 2Q23, recurring net profit may equal Rmb878-967mn （up 48-63% YoY）， with the median reaching an estimated Rmb923mn （up 55% YoY）。 The firm's preannounced 2Q23 results are largely in line with our forecast and market expectations.
　　Trends to watch
　　Demand for waterproof materials remains under pressure; revenue to recover slightly in 2Q23. We note that market demand has been under pressure since March - i.e., cement shipment rate has weakened and was lower than the same period in 2022; apparent consumption of steel has remained largely flat YoY - mainly due to sluggish demand from new- starts in the real estate market and municipal infrastructure construction. As a result, demand in the waterproof industry may remain under considerable downward pressure.
　　However, we note that Oriental Yuhong has accelerated the expansion of its distribution channels through integrated companies, and its retail segment has continued to launch value-for-money products to maintain high growth. We estimate the firm's 2Q23 revenue may still see low-single- digit growth, reflecting resilient revenue growth.
　　Channel adjustment accelerating; operating quality improving.
　　Civil construction: Oriental Yuhong continues to gain market share in the home furnishing material market by expanding distribution channels and product categories as well as offering high value-for- money products. We estimate that revenue from the civil construction segment may increase 30% YoY in 1H23, with growth of about 20% for waterproof products and over 40% for non-waterproof products.
　　Engineering: The firm has made substantial strategic adjustments to its integrated business YTD. It fully expanded its distribution channels and reduced direct-sale businesses. The firm has developed small-　and micro-business partners in lower-tier markets, and strengthened payment collection.
　　We believe these measures will likely enhance channel stickiness, control risks, and improve the quality of its operations. We think that integrated companies may see solid revenue growth in 1H23. We estimate that Oriental Yuhong's revenue contribution from the civil construction group may exceed 25% in 1H23, thanks to channel adjustments in 1H23.
　　We believe the decline in centralized procurement of real estate projects may drive the firm’s high-quality development and improve quality and efficiency of its cash flow.
　　Steady progress; high-quality growth ahead. Despite weak demand from the real estate sector and municipal projects, we believe Oriental Yuhong will strive to unleash market potential, gain greater recognition through more proactive marketing efforts, and register sound growth. We expect the firm's integrated business and its civil construction group to maintain strong growth momentum in 2H23, driving the firm to achieve its full-year revenue target. The firm's operating quality should improve thanks to expansion of channels, thus boosting its valuation, in our view.
　　Financials and valuation
　　We leave unchanged our 2023 and 2024 EPS of Rmb1.45 and Rmb1.82. The stock is trading at 17.9x 2023e and 14.3x 2024e P/E. We maintain an OUTPERFORM rating and our TP at Rmb38 （implying 26x 2023e and 21x 2024e P/E）， with 46% upside.
　　Risks
　　Demand recovery and/or non-real estate business expansion disappoint; competition intensifies; high raw material prices persist longer than expected.
【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。

   【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。