1H23 results largely in line with our expectations

Lets Holding Group announced its 1H23 results: Revenue fell 9.5% YoY to Rmb1.82bn and attributable net profit declined 7.9% YoY to Rmb125mn.In 2Q23, revenue decreased 7.9% YoY to Rmb1.04bn, and attributable net profit fell 4.1% YoY to Rmb77mn. The firm's 1H23 results are largely in line with our expectations.

Demand from main business recovered but remained slightly under　pressure YoY. In 1H23, revenue from the new additive material business and the comprehensive technical services for construction business fell 18% and 7% YoY to Rmb1.09bn and Rmb192mn, due to slow recovery of downstream demand and fiercer competition in the testing business.

Overall GM recovered mildly, while GM of the testing business　declined. In 1H23, the firm's GM grew 0.4ppt YoY to 20.1%, showing a mild recovery. GM of the comprehensive technical services for construction business fell 4.3ppt YoY to 34.4%. In 2Q23, GM rose 0.7ppt YoY and 1ppt QoQ to 20.6%, continuing to recover moderately.

Expense ratio rose slightly, weighing on net profit margin. In 1H23,Lets Holding Group's selling and G&A expense ratios gained 0.7ppt and 0.8ppt YoY to 4.8% and 8.3%, with overall expense ratio rising slightly.

Net operating cash flow under pressure YoY. Net operating cash flow　fell 57% YoY to about Rmb62.01mn in 1H23, and declined 11% YoY to Rmb131mn in 2Q23. We attribute this to relatively weak demand and fiercer competition, which reduced the firm's cash collection from sales.

Trends to watch

The firm's main business still has growth potential thanks to its leading market share and market expansion. As of end-1H23, Lets Holding Group has established a presence in 16 provinces and municipalities in China, with total domestic synthetic additive production capacity reaching 1.39mnt. It has leading market shares in Fujian, Guizhou, Chongqing, Hainan, Shaanxi, and Shanghai. We believe the firm will continue to expand its market share, and that of its main additive business still has room for further growth.

Expanding presence in overseas markets; revenue and profit　contribution to rise. In response to the Belt and Road Initiative, Lets Holding Group set up an additive production base in Laos to cover the Southeast Asian market. We believe it has a leading presence in overseas markets, and its new overseas bases likely will help the firm explore incremental markets and generate considerable revenue and profit contribution in the medium term.

Financials and valuation

We lower our assumptions for sales volume and unit earnings of the firm's main business given slow recovery in industry demand. We lower our 2023 and 2024 attributable net profit forecasts 25.5% and 25.3% to Rmb251mn and Rmb290mn. The stock is trading at 15x 2023e and 13x 2024E P/E. We maintain an OUTPERFORM rating, but we cut our target price 16.7% to Rmb7, with the revision smaller than our earnings forecast revision as the sector may recover from the bottom, implying 20x 2023e and 17x 2024e P/E and offering 32% upside.

Risks

Disappointing demand recovery and/or new capacity expansion.