2023 results miss our expectations

Oriental Yuhong Waterproof announced its 2023 results: Revenue rose 5% YoY to Rmb32.8bn; net profit attributable to shareholders rose 7% YoY to Rmb2.27bn, and recurring net profit increased 2% YoY to Rmb1.84bn, implying EPS of Rmb0.9.

In 4Q23, revenue fell 5% YoY to Rmb7.46bn, net profit turned to a loss of Rmb80.17mn, and recurring net profit was -Rmb331mn; missing our and market expectations due to accounts receivable and asset impairment.

1) Revenue remained solid; the civil construction segment maintained high growth. In 2023, revenue edged up. Specifically, revenue from waterproof membranes, coatings, sand powder and construction rose 7%, 14%, 40%, and -26% YoY, with construction revenue affected by the firm’s downsizing. By channel, revenue from retail channel jumped 28% YoY to Rmb9.2bn, while revenue from engineering and direct sales channels rose 23% and -20% to Rmb12.5bn and Rmb10.4bn, as the firm actively controlled centralized procurement from real estate projects, reduced reliance on real estate developers, and stepped up efforts to undertake construction projects.

2) Gross margin recovered in 2023, but was under pressure in 4Q23: GM fell 1.9ppt YoY to 27.7% in 2023 due to falling prices of raw materials such as asphalt and emulsion. Specifically, GMs of waterproof membranes, coatings, and sand powder rose 1.7ppt, 4.5ppt, and 4.7ppt YoY to 27%, 37%, and 26%. GMs fell 6.4ppt QoQ to 23% in 4Q23 due to falling proportion of retail sales. By channel, the retail channel had the highest GM of 39%, up 4.6ppt YoY, and GMs of the engineering and direct sales channels rose 3.2ppt and -4.4ppt YoY to 24% and 14%.

3) Selling expenses increased; overall expenses remained stable: The selling, G&A, and R&D expense ratios rose 0.6ppt, -1.1ppt, and 0.1ppt YoY to 9.1%, 4.7%, and 1.9% in 2023.

4) Accounts receivable turnover days and impairments increased: In 2023, credit and asset impairment totaled Rmb1.04bn (vs. Rmb393mn in 2022), mainly due to the rising proportion of accounts receivable with longer turnover days, provision for individual item, and impairment　provision for home purchases among other non-current assets, weighing on 2023 net profit.

5) Cash flow improved: In 2023, the accounts receivable turnover days remained largely flat YoY at 112 days, cash flow-to-revenue ratio fell 3ppt YoY to 102%, and net cash flow-to-net profit ratio rose 61ppt YoY to 92%. Net operating cash flow rose Rmb1.4bn YoY to Rmb2.1bn.

6) Dividend payout ratio increases: The firm proposes to distribute a cash dividend of Rmb0.6 per share in 2023, implying a dividend payout ratio of 66%. The current share price implies a dividend yield of 4.2%.

Trends to watch

Steady progress in civil construction to support growth. In 2023, the firm’s civil construction group continued to expand distribution channels (distribution outlets rose from 160,000 in 2022 to 220,000, the number of distributors rose 25%, and the number of “Honggehui” members rose 35% to 2.7mn) to build a sound distribution channel ecosystem. In 2024, we are upbeat that the civil construction business will maintain high revenue growth on the back of channel expansion and product category expansion, bolstering the firm’s revenue and earnings growth.

Financials and valuation

As market demand is under pressure, we lower our 2024 earnings forecast by 31% to Rmb2.8bn and introduce 2025 earnings forecast at Rmb3.4bn. The stock is trading at 13x 2024e and 10x 2025x P/E. We maintain OUTPERFORM rating. Given the demand and profit pressure, we cut our target price 44% to Rmb18 (16x 2024e and 13x 2025E P/E), implying 28% upside.

Risks

Disappointing demand recovery; sharper-than-expected impairment; slowing growth of retail business.