1Q24 results in line with our expectations

Sinoma International Engineering announced its 1Q24 results: Revenue rose 2.74% YoY to Rmb10.29bn, net profit attributable to shareholders rose 3.08% YoY to Rmb636mn, and recurring net profit grew 12.35% YoY to Rmb654mn. The firm's 1Q24 results are in line with our expectations.

Revenue and profit remained solid; gross margin improved markedly. In 1Q24, the firm's revenue maintained solid growth and its blended gross margin rose 2.5ppt YoY to 19.5%, enabling recurring net profit to make a double-digit growth YoY.

Overall expense ratio rose; forex losses weighed on financial expenses. In 1Q24, selling, G&A and financial expense ratios were 1.3% (flat YoY), 4.5% (+0.4ppt YoY) and 2.3% (+1.6ppt YoY). Specifically, financial expenses increased by Rmb169mn YoY to about Rmb238mn. We attribute the sharp rise in the firm's financial expenses to the depreciation of the Nigerian Naira and the recognition of forex losses in financial expenses by the firm in 1Q24.

Cash flow improved to some degree. In 1Q24, net operating cash outflow dropped notably to Rmb1.188bn, as the firm strengthened contract settlement and project payment collection and reduced restricted funds.

Strong growth in operation & maintenance (O&M) and overseas new orders in 1Q24. The firm's new contracts in 1Q24 fell 2% YoY to about Rmb21.2bn. Structurally, contracts for engineering and technological services fell 12% YoY, those for high-end equipment manufacturing rose 2% YoY, and those for production and operation services grew 43% YoY (mine O&M up 32% YoY and cement O&M up 15% YoY). By region, new contracts from China fell 48% YoY to Rmb6.9bn, and overseas new orders rose 70% YoY to Rmb14.3bn.

Trends to watch

Ample backlog of contracts to support revenue growth. At end-1Q24, the firm's outstanding contract value fell 6.6% YoY to about Rmb55.4bn but remained relatively high. We believe the ample backlog of contracts will likely provide solid support for the firm’s revenue growth.

Profit margin to continue rising; returns from equipment business and O&M business to increase. We expect the firm's blended gross　margin to continue rising in the medium term as it implements overseas contracts. As the scale of high-margin equipment and O&M businesses grows, we expect their profit contribution to increase further, helping improve the firm's operational efficiency.

Financials and valuation

We keep our 2024 and 2025 attributable net profit at Rmb3.415bn and Rmb3.90bn. The stock is trading at 9.8x 2024e and 8.6x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb14.7, implying 11.4x 2024e and 10.0x 2025e P/E, offering 16% upside.

Risks

Disappointing contract execution and/or growth of equipment and O&M businesses.