2022 results miss our forecasts

Lets Holding Group announced 2022 results: Revenue fell 19.7% YoY to Rmb3.95bn, and attributable net profit slid 22.5% YoY to Rmb211mn. In 4Q22, revenue fell 34.4% YoY to Rmb889mn, and attributable net profit declined 96.3% YoY to Rmb1.45mn. The firm’s 4Q22 and 2022 results missed our expectations, mainly due to provisions for goodwill impairment of about Rmb50.74mn in 4Q22.

Sales volume and revenue of new additive materials under pressure. In 2022, the sales volume of new additive materials fell 17% YoY to 1.38mnt, with the market share up 0.3ppt YoY to 9.8%. Revenue from new additive materials fell 18% YoY to Rmb2.52bn.

GM resilient. In 2022, the ASP of new additive materials edged down YoY to Rmb1,825/t, but GM rose 3.49ppt YoY to 22.44%, which we attribute to polyether prices that were down 7% YoY.

Expense ratio rose. Due to shrinking sales, the firm’s selling, G&A and R&D expense ratios rose 0.7ppt, 0.7ppt, and 0.9ppt YoY in 2022, and the increase in GM was largely offset by higher expense ratios.

Cash collection stable; cash flow continued improving. Net operating cash flow expanded 30.6% YoY to about Rmb420mn in 2022 （about Rmb258mn in 4Q22）。 The ratio of the firm’s net profit to operating cash flow was 2.03 in 2022 （vs. 1.17 in 2021）， and cash collection from sales has improved despite tight funding along the value chain.

Testing business: In 2022, revenue from the testing and certification business of Jianyan Testing （a subsidiary） fell 9% YoY to Rmb235mn and the net profit declined 8% YoY to Rmb25.68mn, shrinking slightly but resilient. Jianyan Testing has expanded into industrial and new energy electronics, medical electronics, and special electronics, reporting more than Rmb30mn of revenue from these new offerings in 2022.

Trends to watch

Leadership position solid; poised to benefit from industry recovery. Demand for commercial concrete and additives slumped in 2022 due to the decline in real estate demand and gradual improvement of infrastructure construction. Despite the headwinds, the firm gained share for its main business and remains the industry’s No.2 by market share.

In 2023, we think pro-growth policies around infrastructure construction investment will be crucial to the economy and for promoting employment amid the slow recovery of physical goods consumption and the pressure on exports.

We expect a recovery in market demand for concrete and additives, and in the wider industry, as the drag on real estate demand weakens and the completion of infrastructure construction accelerates. Coupled with lower prices for polyether, we see upside in the firm’s sales volume and per-tonne earnings in 2023.

Financials and valuation

We maintain our 2023 attributable net profit of Rmb338mn and introduce our 2024 attributable net profit forecast of Rmb388mn. The stock is trading at 14.4x 2023e and 12.5x 2024e P/E. We maintain OUTPERFORM. Given sector recovery, we raise our target price 20.3% to Rmb8.40 （17.8x 2023e and 15.5x 2024e P/E）， offering 24% upside.

Risks

Disappointing demand recovery; sharper-than-expected cost hikes.