Results Review

2024 results miss our expectations

Capol International & Associates announced its 2024 and 1Q25results: 2024 revenue fell 22.55% YoY to Rmb1,167mn, and net profitattributable to shareholders fell 22.33% YoY to Rmb125mn. In 1Q25,revenue rose 15.4% YoY to Rmb264mn, and net profit attributable toshareholders declined 20.2% YoY to Rmb2.48mn. The firm's 2024 resultsmissed our expectations due to higher-than-expected provision for creditimpairment. 1Q25 results were in line with our expectations.

1) Revenue from main business faced downward pressure. In 2024,revenue from the architectural design business fell 14.98% YoY toRmb0.95bn, and revenue from the cost estimating consulting business fell19.37% YoY to Rmb153mn, putting pressure on revenue from the mainbusiness amid insufficient downstream demand. 2) Blended GMcontinued to improve. In 2024, the firm's blended GM rose 2.9ppt YoY toabout 35.1%1, with GM of the architectural design business up 1.4ppt YoYto 36.4% and that of the cost estimating consulting business down 4.3pptYoY to 37.9%. 3) Expense ratio edged up. In 2024, the firm's fourexpense ratios combined rose 1.1ppt YoY to 16.6%, and its selling, G&A,R&D, and financial expense ratios were down 0.3ppt, up 1.7ppt, down0.7ppt, and up 0.4ppt YoY to 2.4%, 9.7%, 3.8%, and 0.7%. 4) Operatingcash flow under pressure. The firm's net operating cash flow fell 39.27%YoY to Rmb174mn in 2024, and its accounts receivable turnover daysincreased to 198 days in 2024 (vs. 180 days in 2023), implying pressureon payment collection amid falling demand. 5) Balance sheet remainedstable. In 2024, the firm's liability-to-asset ratio fell 1.9ppt YoY to 47.1%,and its interest-bearing debt ratio rose 0.9ppt YoY to 14.2%. 6) Dividendpayout ratio remained high. The firm declared a dividend of Rmb0.35/shwith a dividend payout ratio of 54.8%, implying a dividend yield of about2.6%.

Trends to watch

Expanding digital culture business; accelerating businesstransformation. In September 2024, the company invested in thedevelopment of the digital culture industry and established a digital culturebusiness subsidiary to enter the short video market and expand itspresence along the creative culture industry value chain. In 2024, the　　company's digital culture business generated revenue of Rmb8.46mn. Weexpect the firm's transformation into the digital culture industry to create asecond growth driver, and we are upbeat on the improvement of itscomprehensive competitive advantages in the medium and long term.

Financials and valuation

As the main business still faces challenges, we lower our 2025 attributablenet profit forecast 10.3% to Rmb151mn, and introduce our 2026attributable net profit forecast at Rmb167mn. The stock is trading at 17.3x2025e and 15.8x 2026e P/E. Considering the new growth driver broughtby the firm's new digital culture business, we maintain an OUTPERFORMrating and our target price of Rmb18. Our TP implies 23.3x 2025e and21.2x 2026e P/E, offering 34.4% upside.

Risks

Slower-than-expected execution of backlog projects; disappointingdevelopment of the digital culture business.