LETS HOLDING GROUP(002398)：GM IMPROVES NOTABLY; MARKET SHARE RISES STEADILY-格隆汇

机构：中金公司
研究员：Qing GONG/Yan CHEN/Maoda YANG

　　2023 results miss our expectations
　　Lets Holding Group announced its 2023 results: Revenue fell 22.5% YoY to Rmb3.06bn and attributable net profit declined 24.8% YoY to Rmb159mn. The firm's 2023 results missed our expectations, mainly due to higher-than-expected impairment provisions and expense ratios.
　　Weak demand weighs on sales volume and revenue of new additive materials. In 2023, sales volume of new additive materials fell 2.2% YoY to 1.35mnt, and revenue from new additive materials dropped 11% YoY to Rmb2.24bn.
　　GM improves despite headwinds; market share rises steadily. In 2023, the firm's blended gross margin (GM) rose 3.3ppt YoY to 24.8%, with GM of new additive materials up 1.8ppt YoY to 24.2%, and GM of technical services down 1.0ppt to 32.6%. The firm estimates that its market share of new additive materials rose 0.2ppt YoY to 10% in 2023, improving steadily despite industry headwinds.
　　Overall expense ratio rises. In 2023, selling, G&A, and R&D expense ratios rose 1.8ppt, 1.0ppt, and 0.9ppt YoY to 6.7%, 5.0%, and 5.6%. We think rising expense ratios weighed on profit amid falling sales revenue.
　　Payment collection remains solid; net operating cash flow improves. In 2023, the firm's net operating cash flow rose 4.13% YoY to Rmb437mn, implying solid payment collection in 2023 despite falling profits and weakening downstream payment capability, in our view.
　　Impairment pressure remains prominent, weighing on profit. In 2023, the firm made provisions for credit impairment loss of about Rmb55.6mn and asset impairment loss of Rmb39.9mn, mainly due to the impairment of accounts receivable and contractual assets. We note that the firm’s total impairments slightly narrowed YoY, but still weighed on profit.
　　Trends to watch
　　Testing business to scale up. At end-2023, the firm’s subsidiary Jianyan Testing (JYT) obtained certification as an authorized and recognized laboratory by Seres and Dongfeng Liuzhou Motor. JYT serves as a third-　party laboratory of these two companies, providing testing, data and reporting services to their electronic component suppliers nationwide. In 2023, JYT’s comprehensive technical service business grew steadily, generating revenue of Rmb421mn and net profit of Rmb17.58mn. We expect the firm to expand its testing business.
　　Financials and valuation
　　Due to greater-than-expected downward pressure on demand, we lower our 2024 attributable net profit forecast 43.9% to Rmb162mn and introduce our 2025 attributable net profit forecast to Rmb182mn. The stock is trading at 17.0x 2024e and 15.2x 2025e P/E. Maintain OUTPERFORM. Given the firm's strengthening market position, we only cut our target price 28.6% to Rmb5, implying 22.0x 2024e and 19.6x 2025e P/E with 29% upside.
　　Risks
　　Demand recovery disappoints; competition intensifies.