LETS HOLDING GROUP(002398)：1H24 RESULTS MISS OUR FORECAST; INDUSTRY TO RECOVER-格隆汇

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

1H24 results miss our expectations
Lets Holding Group announced its 1H24 results: Revenue fell 21% YoY to Rmb1.18bn, and net profit attributable to shareholders fell 42% YoY to Rmb72.38mn. In 2Q24, revenue fell 23% YoY to Rmb658mn, and net profit attributable to shareholders fell 60% YoY to Rmb30.5mn. The firm's 1H24 results missed our expectations, mainly due to greater-than-expected pressure on GM.
Revenue declined YoY due to demand pressure in the main business. According to the National Bureau of Statistics, China's cement output fell by 10% YoY to approximately 850mnt in 1H24. During the same period, revenue from the firm’s technical services and new additive materials businesses decreased by 20% YoY, to Rmb154mn and Rmb878mn, exerting downward pressure on revenue from the main business amid challenges in downstream demand.
GM declined due to intense competition in the new additive material industry. In 1H24, the firm's blended GM decreased by 1.7ppt YoY to 23.4%. Specifically, the GM of its main new additive material business fell by 4.4ppt YoY to 20.3%. In 2Q24, the GM was approximately 21.7%, down by 3.3ppt YoY and 2.5ppt QoQ.
The performance of the firm’s technical service business improved notably and remained competitive. The GM of this segment increased by 3.6ppt YoY to 38.0% in 1H24. Revenue from Xiamen Construction Engineering Checking Centre, the firm’s wholly-owned subsidiary, rose slightly YoY to Rmb96.96mn, while net profit surged by 119% YoY to Rmb21.44mn. The firm’s technical service business continues to demonstrate strong competitiveness and effective cost control, with steadily improving earnings.
The expense ratio increased. In 1H24, the selling, G&A, and financial expense ratios rose by 1.2ppt, 1ppt, and 0.3ppt YoY, indicating limited room for expense reduction amid overall downward pressure on revenue. Payment collection faced pressure, putting notable strain on operating cash flow. Net operating cash flow was -Rmb74.34mn in 1H24 (compared to +Rmb62.01mn in the same period last year). Payment collection was under pressure in 1H24 due to weak downstream demand and a funding shortage along the industry chain.
Trends to watch
Business climate likely to recover in 2H24; earnings likely to bottom out. In 1H24, demand from the real estate industry continued to decline, and infrastructure projects faced delays due to a shortage of funds.
Consequently, the firm's main new additive material business encountered notable downward pressure on demand, which also substantially impacted the collection of sales proceeds. Looking ahead to 2H24, we expect downstream demand to gradually recover, driven by funding support from special government bonds, treasury bonds, and stronger fiscal measures. This should bolster the firm's sales of new additive materials, leading to growth in revenue and profit.
Financials and valuation
We keep our 2024 and 2025 net profit attributable to shareholders unchanged at Rmb162mn and Rmb182mn. The stock is trading at 15.6x 2024e and 13.9x 2025E P/E. We maintain an OUTPERFORM rating and TP of Rmb5.0, implying 21.5x 2024e and 19.2x 2025e P/E, implying 38% upside.
Risks
Demand recovery disappoints; competition intensifies.