2023 results missing our expectations; 1Q24 largely in line

GETO New Materials announced its 2023 and 1Q24 results. In 2023, revenue rose 16% YoY to Rmb2.24bn; attributable net profit fell 126% YoY to -Rmb45.3mn; and recurring net profit fell 157% YoY to -Rmb81.90mn, slightly missing our expectations due to sharper-than-expected decline in GM. In 1Q24, revenue rose 18% YoY to Rmb450mn; attributable net profit turned negative to -Rmb18.04mn; and recurring net profit fell Rmb23.45mn YoY to -Rmb31.83mn, largely in line with our expectations.

2023: Revenue maintained high growth; new businesses contribute the most incremental revenue. The firm's revenue maintained rapid growth in 2023. The core aluminum formwork business rose 6% YoY to Rmb1.38bn, with overseas business up 26% YoY to Rmb367mn, contributing most of the growth of the aluminum formwork segment. The protective platform revenue fell 2% YoY to Rmb198mn (mainly due to the impact of new regulations on the occupancy rate), and revenue from prefabricated concrete (PC) products grew 90% YoY to Rmb364mn.

GM is under pressure. GM of aluminum formwork systems fell 8.8ppt YoY to 25% as new starts in the real estate industry fell and the unit rental prices of aluminum formworks dropped. GM of sales of protective platforms, PC, and scrap materials fell 18.5ppt, 6.6ppt, and 8.4ppt YoY to -1.3%, 13.6%, and 27%.

Expense ratios rose. The firm's expense ratios rose as it increased efforts in recruitment, but core businesses have grown slowly. The selling and G&A expense ratios rose 0.8ppt and 0.9ppt YoY to 7.4% and 5.4%, and the R&D expense ratio fell 0.7ppt YoY to 4.1%. Financial expenses increased 89% YoY to Rmb73.33mn due to convertible bonds, and credit impairment loss totaled Rmb88.08mn, resulting in net margin falling 11.2ppt YoY to -2%.

Extended accounts receivable days weigh on cash flow. In 2023, accounts receivable turnover days rose 54 days YoY to 194 days, cash-to- revenue ratio rose 1ppt YoY to 78%, and operating cash outflow reached Rmb475mn. Debt-to-asset ratio rose. The debt-to-asset ratio rose 6.3ppt YoY to 68%, and the net gearing ratio grew 23ppt YoY to 90%.

1Q24: Revenue maintained rapid growth. Revenue growth reached 18% in 1Q24, 15ppt faster than in 4Q23. GM rose QoQ. In 1Q24, GM rose 7.2ppt YoY to 21.7%. The expense ratio slightly grew. In 1Q24, the expense ratio grew 0.4ppt YoY to 26%, with financial and G&A expense ratios rising 1.9ppt and 1.1ppt YoY.

Trends to watch

Underperformed companies are rapidly exiting the market, and the firm's market share is rising steadily. In 2023, the number of aluminum formworks in the industry dropped by 8% YoY, the market size fell by 14% YoY, and the number of companies in the industry decreased by 50% YoY, leading to market clearing out quickly. However, the company has maintained decent growth with regional expansion. Looking ahead, we expect the firm to gradually regain profitability by improving per-capita efficiency, reducing expenses, and actively exploring overseas markets.

Financials and valuation

Due to pressure on demand and prices, we lower our 2024 net profit forecast 44% to Rmb66mn and introduce 2025 net profit forecast of Rmb137mn. The stock is trading at 28x 2024e and 13x 2025e P/E. Given the accelerated exit of underperformed companies and the firm’s leading position, we maintain OUTPERFORM and cut our target price 46% to Rmb9 (33x 2024e and 16x 2025e P/E), offering 22% upside.

Risks

Intensifying competition; falling demand; rising bad debts of accounts receivable.