1H22 results missed our forecast

QuakeSafe Technologies (QuakeSafe) announced its 1H22 results: Revenue grew 29.9% YoY to Rmb431mn and attributable net profit declined 16.5% YoY to Rmb54.64mn. In 2Q22, revenue increased 12.2% YoY to Rmb203mn and attributable net profit declined 38.5% YoY to Rmb22.09mn. The results missed our forecasts mainly due to slower revenue growth.

In 2Q22, gross margin rose 0.9ppt YoY to 48.1%, up 10.6ppt QoQ vs. 1Q22. We attribute this to falling raw material prices. Combined expense ratio rose 6.6ppt YoY to 27.0%, with selling, R&D, and financial expense ratios up 1.1ppt, 0.9ppt, and 4.7ppt YoY. We attribute the higher financial expense ratio to increasing interest expenses due to new financing. In 2Q22, attributable net margin fell 9.0ppt YoY to 10.9%.

Net operating cash inflow came to Rmb41.08mn in 1H22, improving YoY compared with net outflow of Rmb98.23mn in 1H21. We attribute this to increased value-added tax credit refunds. Net investment cash outflow stood at Rmb97.78mn in 1H22, narrowing YoY compared with net outflow of Rmb316.61mn in 1H21.

Trends to watch

Consolidation of Green Lighting contributed to high revenue growth; 2H22 revenue likely to maintain stable growth. In 1H22, the firm’s revenue grew 29.9% YoY. We think the consolidation of Green Lighting into the firm’s financials drove revenue up by about Rmb40mn. Excluding the impact of the consolidation, we estimate revenue grew about 18% YoY, relatively stable vs. 2021. Looking into 2H22, we think the financial strain on local governments and real estate developers will hold the firm back from implementing and advancing projects, as well as collecting payments. However, we expect market demand to expand further thanks to policies urging the use of seismic mitigation and absorption products. This, combined with ample backlog orders, will help the firm maintain relatively fast revenue growth in 2H22, in our view.

Gross margin to rise YoY in 2H22. The firm’s gross margin equaled 33.2%, 37.5%, and 48.1% over 4Q21-2Q22. We think gross margin will likely stay high HoH in 2H22 considering average steel material prices should remain low compared with 2H21. Meanwhile, we think gross margin will further increase YoY in 2H22 amid the low base in 2H21.

Financials and valuation

Given the disappointing implementation of projects due to downstream proprietors’ financial strain, we lower our 2022 and 2023 attributable net profit forecasts 33% and 34% to Rmb238mn and Rmb441mn. The stock is trading at 32.6x 2023e P/E. We maintain OUTPERFORM. Considering the rebound in market risk appetite, we maintain our TP of Rmb72.40, implying 39.8x 2023e P/E, offering 22% upside.

Risks

Disappointing implementation of projects.