1Q25 results in line with our expectations

Sinoma International Engineering announced its 1Q25 results: Revenue fell 1.37% YoY to Rmb10.15bn, net profit attributable to shareholders rose 4.19% YoY to Rmb663mn, and recurring attributable net profit dropped 8.38% YoY to Rmb599mn, in line with our expectations.

New orders maintained high growth in 1Q25; overseas sales impressive. New contracts in 1Q25 grew 31% YoY to about Rmb27.88bn, with new contracts up 43% YoY for engineering and technological services, 65% YoY for high-end equipment manufacturing, but down 16% YoY for production and operation services (mine operation and maintenance -2% and cement operation and maintenance +0.5%). By region, new domestic contracts rose 1% YoY to Rmb7.02bn, and new overseas contracts grew 46% YoY to Rmb20.86bn. As of end-1Q25, outstanding contracts stood at about Rmb58.56bn.

In 1Q25, gross margin came under slight pressure; financial expenses fell sharply. In 1Q25, gross margin fell 2.5ppt YoY to 17.0%. Expense ratio fell 2.9ppt YoY to 5.3%, with selling and G&A expense ratios staying flat YoY at 1.2% and 4.5%, and financial expenses down Rmb48.467mn (vs. Rmb238mn a year earlier due to FX losses).

Net operating cash outflow increased. Net operating cash outflow widened to Rmb1.87bn in 1Q25, possibly due to slow settlement and payment collection amid a weak cement market. However, we expect earnings of leading cement companies to improve and payment collection from their domestic businesses to improve in 2025.

Trends to watch

Overseas business to continue expanding; upbeat on rising gross margin in the medium term. In 1Q25, orders for domestic engineering and technological services grew a strong 44% YoY. We expect the drag on earnings from domestic engineering and equipment business to ease markedly as the firm expands its presence in industries other than equipment. Overseas demand remained strong, with new overseas orders up 46% YoY, with new orders of engineering technology services and high- end equipment manufacturing up 46% and 220% YoY. We expect the firm to benefit from rising fiscal spending in Europe. In the medium term, we are upbeat on order growth and gross margin improvement driven by the implementation of overseas contracts and the rising penetration rate of overseas equipment. The dividend yield stands at an attractive level of around 5%.

Financials and valuation

As the domestic business remains under pressure, we cut our 2025 and 2026 earnings forecasts 4.9% and 7.7% to Rmb3.14bn and Rmb3.36bn. The stock is trading at 8.0x and 7.4x 2025e and 2026e P/E. Considering the attractive dividend yield and strong overseas demand, we maintain an OUTPERFORM rating and TP of Rmb12.5, implying 10.5x and 9.8x 2025e and 2026e P/E, and offering 32% upside.

Risks

Disappointing growth of equipment and operation & maintenance business; slower-than-expected progress in contract execution.