1H22 results mark the tough
- China Lesso’s 1H22 operating performance was affected by COVID-19 control measures and high input costs.
- The Company didn’t declare an interim dividend in order to reduce the debt level, given the US rate hike, but will maintain the payout ratio for the full year.
- The Company’s performance in expected to be supported by increasing exposure to SOE property development, infrastructure investment and normalization of costs.
- We revised down our net profit forecast for 2022F–2024F by 9.4%–16.5% after factoring in lower shipment volume (but we factored in a higher gross profit margin). Reiterate ADD with a lower target price of HK$12.45 (12x 20212 P/E).
1H22 results highlights
Despite impact of COVID-19 controls measures and credit events in the property sector, China Lesso’s revenue increased slightly from Rmb14,723m in 1H21 to Rmb14,890m in 1H22. China Lesso reported a 5.0% yoy decline in sales volume of plastic pipe, which was offset by a 6.8% yoy increase in average selling prices. China Lesso reported a gross profit of Rmb3,943m in 1H22, down from Rmb4,374m in 1H21. It reported a gross profit margin of 26.5% in 1H22, down from 29.7% in 1H21. The yoy decline in gross profit margin was due mainly to the Company’s consumption of high-priced raw materials that had been purchased in 4Q21 for 1H22. China Lesso’s shipment volume in 1H22 was lower than our expectation, but its gross profit margin was better than our forecast (25.9%) for full-year China Lesso reported a net profit of Rmb1,295m in 1H22, down 26.8% yoy from Rmb1,814m in 1H21. It did not declare an interim dividend vs. HK$0.12 for 1H21. Management mentioned that the suspension of the interim dividend payout was due to the challenging environment (US interest rate hikes and credit events in the property sector), but that the dividend policy of two payments a year with a payout ratio of not less than 30% will be maintained in the future. The payout of 30% is expected to continue for FY2022.
Normalization hoh
Regarding the demand side, we believe that the Company’s strategy of penetrating SOE property developers, which are less affected by the tightening measures, will help it outperform its peers. China Lesso is expected to be a beneficiary of the pick-up in infrastructure investment in China. PVC prices have corrected since Jun 22, and China Lesso is expected to face less pressure in terms of working capital management. We expect China Lesso to report a rebound in its gross profit margin in 2H22 vs. 1H22. The easing of tightening measures in China’s property market is expected to boost sentiment on China Lesso. During the results presentation, management mentioned that the Company had made sufficient provisions for its property-related business.
New long-term growth driver
China Lesso established Guangdong Lesso Banhao Photovoltaic New Energy Technology to provide integrated energy solutions, a wide range of photovoltaic systems and products, and all-in-one professional services for global industrial and commercial enterprises and households. The new operation will have three production lines to assemble and produce photovoltaic products. China Lesso can leverage its channels to promote applied photovoltaic (BAPV) solutions to its existing customers. The contribution from this new business venture is expected to be very limited in the early stages, but it is expected to be a new long-term growth driver.
Reiterate ADD
We lowered our 2022F–2024F net profit forecasts by 9.4%–16.5% to reflect lower-than-expected volume shipments but higher margins. We lower our TP from HK$14.07 to HK$12.45 (12x 2022F P/E, unchanged) to reflect our lower profit forecast.
