2024 results miss our expectations

China Design Group announced its 2024 results: Revenue fell 17.28% YoY to Rmb4.43bn, and net profit attributable to shareholders fell 45.17% YoY to Rmb383mn. In 4Q24, revenue fell 19.67% YoY to Rmb1.74bn and net profit attributable to shareholders fell 56.65% YoY to Rmb151mn.

The 2024 results missed our expectations due to higher-than-expected provisions for asset and credit impairment.

1) Revenue from traditional businesses faces significant challenges. In 2024, revenue from planning & research, survey & design, comprehensive testing, digital & intelligent business, and low- carbon & environmental services reached Rmb416mn, Rmb2.35bn, Rmb489mn, Rmb421mn, and Rmb431mn (-14.18%, -25.85%, - 5.17%, +7.76%, and +2.10% YoY), mainly due to a decline in revenue from the traditional business segment dragged by the downturn in the traditional businesses and intensifying competition, while revenue from digital & intelligent business, and low-carbon & environmental services increased compared with 2023.

2) Gross margin faces downward pressure. In 2024, gross margin fell 1.8ppt YoY to 37.2%. Gross margin of planning & research, survey & design, and comprehensive testing -5.86ppt, -1.32ppt, and +3.09ppt YoY to 43.65%, 40.90%, and 33.36%. Gross margin of the low-carbon and environmental services rose another 6.03ppt YoY to 28.35%.

3) Expense ratio edged up YoY. In 2024, overall expense ratio reached about 19.3% (+0.9ppt YoY), as the selling expense ratio rose 1.4ppt YoY to 6.4%.

4) Increased impairments weigh on earnings. Provisions for asset and credit impairment losses totaled about Rmb324mn in 2024, up Rmb32mn YoY.

5) Operating cash flow under pressure. In 2024, net operating cash flow fell 38.6% YoY to Rmb307mn, mainly due to the shortage of funds in the downstream value chain and the pressure on payment collection.

Trends to watch

Expanding presence in emerging businesses. Given the cyclical downturn in the traditional infrastructure construction market, the firm has taken the initiative to implement strategic transformation, accelerating its expansion in emerging segments such as low-altitude economy, vehicle- road coordination, and intelligent testing, and actively promoting the expansion of emerging business markets. New orders remained largely flat YoY in 2024, and revenue from emerging business segments reached Rmb1.38bn in 2024, contributing more than 31% of total revenue.

Financials and valuation

Due to higher provisions for asset and credit impairment, we cut our 2025 earnings forecast by 17.7% to Rmb497mn and introduce our 2026 earnings forecast at Rmb558mn, implying 10.2x 2025e and 9.1x 2026e P/E. We maintain an OUTPERFORM rating and target price of Rmb9.4, implying 12.9x 2025e and 11.5x 2026e P/E and offering 26.2% upside.

Risks

Revenue recognition of design business disappoints; competition intensifies.