Glodon reported 3Q23 financial results: total revenue grew by 1% YoY to RMB1.71bn in 3Q23, below CMBI/consensus estimate of RMB1.89/2.00bn. 9M23 total revenue was up 7% YoY to RMB4.78bn. Net income declined by 94% YoY to RMB13.4mn in 3Q23 (versus CMBI/consensus estimate of RMB279/351mn), primarily due to soft revenue growth and increase in R&D investments. 9M23 net income decreased by 58% YoY to RMB278mn. In view of the persisting headwinds in the housing construction market and softer-than-expected 9M23 performance, we lower FY23-25 total revenue estimate by 6-8% and also trim FY23 net income estimate by 27%. We cut our target price to RMB29.75 (previous: RMB45.10), based on 6.0x FY23E EV/Sales.

Construction costing: persisting sector headwinds impact growth.

Construction costing revenue grew by 6% YoY to RMB1.3bn in 3Q23 (77% of total revenue), with its SaaS revenue up by 15% YoY to RMB963mn. Newly signed contract value declined by 13% YoY to RMB968mn in 3Q23, as construction clients cut their digital spending given the headwinds in housing market. Despite the decline in new contract acquisition, the renewal rate increased by c.3ppt YoY in 3Q23. For the new digital costing business, SaaS revenue grew by 79% YoY to RMB454mn in 9M23, but newly signed contract value was down 22% YoY to RMB427mn, as the company focuses more on the project deployment and lighthouse customer accumulation rather than new customer acquisition in 2023.

Construction management: focus on quality growth. Construction management revenue dropped by 26% YoY to RMB291mn in 3Q23 (17% of total revenue), mainly due to the decline in housing new start (down 23% YoY in 9M23) and the tightening budget of construction enterprises. Going forward, the company will take initiatives to drive more quality growth of construction management business: 1) increase sales of higher-margin self- developed products; 2) optimize customer structure to have higher revenue contribution from infrastructure projects; 3) focus on the loss reduction and cash flow performance of the projects.

Expense control to drive margin recovery. Glodon’s net margin was down by 13.5ppt YoY to 0.8% in 3Q23, primarily due to the company’s investments in R&D and slowdown in revenue growth. S&M/R&D expenses rose 20/49% YoY to RMB522/546mn in 3Q23, equivalent to 30.5/31.9% of total revenue (vs. 25.8/21.6% of total revenue in 2Q23). In view of sector headwinds, the company has stopped hiring, controlled headcount growth and cut discretionary expenses. Supported by its quality growth strategy, we expect its net margin to bottom out from 3Q23 onwards.

Maintain BUY. We lower our target price by 34% to RMB29.75 (previous: RMB45.10), based on 6.0x FY23E EV/Sales, which is on par with the SaaS peer’s average. Glodon’s leadership in China’s digital construction market remains intact and we expect its earnings growth to reaccelerate in FY24E.

Current forward 1-year PE and PS are both 2 S.D below 3-year average, offering decent safety margin. Maintain BUY.