What happened

LI Weiguo, the controlling shareholder of Oriental Yuhong Waterproof (Oriental Yuhong), proposed the firm’s profit distribution plan for 2023: The total amount of cash dividends to all shareholders should be no less than 50% of attributable net profit in 2023, beating our and market expectations. We estimate the dividend yield may reach 3% in 2023 and 4% in 2024, which is attractive.

Comments

Controlling shareholder proposes 2023 dividend payout ratio at no less than 50%; current dividend yield attractive. According to corporate filings, Oriental Yuhong’s controlling shareholder and actual controller Mr. Li proposed distributing profits in the form of cash dividends in 2023. The suggested total amount of cash dividends to all shareholders should be no less than 50% of the audited attributable net profit in 2023.

We believe the proposal beats our and market expectations. If the dividend payout ratio is adopted for 2023, we estimate the total cash dividend may reach Rmb1.5bn, implying a dividend yield of about 3.4% in 2023. If the payout ratio continues in 2024, the dividend yield may exceed 4%, reflecting Oriental Yuhong's strengthening organic growth momentum and improving operating quality, in our view.

In retrospect, Oriental Yuhong's cumulative cash dividends reached Rmb3.36bn since its IPO in 2008, implying a cumulative payout ratio of 17%. Its cash dividends totaled Rmb1.76bn in 2020-2022, with a cumulative payout ratio of 18%. The firm plans to substantially increase its cash dividend, which is already close to 50% of the cumulative historical dividend in 2023 alone. We attribute this to the following factors:

Revenue contribution from retail business increased notably, contributing high-quality cash flow. Thanks to the firm's efforts to develop its retail business in 2023, it has made substantial progress in base and auxiliary materials for decoration through building distribution channels, expanding product categories, and launching high value-for- money products. As a result, Oriental Yuhong's revenue from the civil　construction group has maintained rapid growth of over 30%, contributing high-quality cash flow and profit margins.

We estimate that Oriental Yuhong’s retail business contributed more than 30% of total revenue and over 50% of total profit in 2023. We expect the retail business to contribute sustained and solid high-quality cash flow to the firm, maintain rapid growth, and support stable dividend payout ratios.

Demand in engineering and construction businesses under pressure; funds outstanding decreasing. In 2023, Oriental Yuhong tightened credit conditions and reduced the supply of centralized procurement for real estate developers. In addition, the firm stepped up efforts to expand distribution channels for integrated companies and relied more on project distributors to contract projects. We think the firm's revenue from its engineering and construction businesses may remain largely stable.

We note that the distribution channel structure of Oriental Yuhong's engineering and construction businesses continues to change. Meanwhile, revenue contribution from large business customers fell, but that from small business customers rose. We believe that funds outstanding may decrease and operating cash flow is likely to gradually increase.

Capex peaked; free cash flow to improve. After the private placement in 2020, Oriental Yuhong's capex exceeded Rmb4bn in both 2021 and 2022, and declined to Rmb1bn in 1-3Q23. Looking ahead, we believe the firm's production capacity can support its long-term growth, and its capex has peaked. We expect its free cash flow to improve, supporting its cash dividend in the long term.

Risks

Dividend proposal subject to approval by extraordinary general meeting (EGM); market demand disappoints.