3Q24 results in line with our expectations

Sinoma International Engineering announced its 1-3Q24 results: Revenue rose 0.7% YoY to Rmb31.73bn and net profit attributable to shareholders grew 2.9% YoY to Rmb2.06bn. In 3Q24, revenue fell 1.1% YoY to Rmb10.84bn and attributable net profit grew 4.2% YoY at Rmb661mn, in line with our expectations.

1) Revenue slowed and GM fell slightly in 3Q24. Revenue fell 1.1% YoY in 3Q24, slightly slower than in 1H24. In 3Q24, GM fell 1.3ppt YoY and 1.5ppt QoQ to 17.8%. We attribute changes in revenue growth and GM to the pace and structure of order booking.

2) Expense ratio fell, and the pressure of FX loss was effectively controlled. In 3Q24, selling, G&A, R&D, and financial expense ratios were 1.1%, 4.7%, 0.5%, and 3.9% YoY, +0.1ppt, +0.6ppt, -0.2ppt, and - 0.7ppt YoY. The overall expense ratio fell 0.2ppt YoY. Meanwhile, the financial expenses have largely stabilized in the past two quarters, showing that FX losses (depreciation of foreign currencies held) that significantly weighed on profit in 1Q24 were effectively controlled.

3) Net investment income expanded YoY. The investment income rose Rmb63.65mn YoY to about Rmb13mn in 3Q24 and rose Rmb70.95mn YoY to Rmb37.77mn in 1-3Q24.

4) The effective tax rate has increased and the proportion of minority interest income has decreased.In 3Q24, the firm's effective tax rate rose 1.9ppt YoY, and minority interest income as a percentage of pre-tax profit fell 4.2ppt YoY.

5) Net margin continued to improve YoY; operating quality improved. In 1-3Q24, the quarterly attributable net margin rose 0.02ppt, 0.07ppt, and 0.31ppt YoY to 6.2%, 7.2%, and 6.1%, and the improvement of net margin accelerated in 3Q24, indicating improving operating quality.

6) Net operating cash outflow widened YoY. Net operating cash outflow widened Rmb246mn YoY to about Rmb260mn in 1-3Q24, and Rmb2.07bn YoY to about Rmb1.15bn in 3Q24.

Trends to watch

Orders growth accelerate notably in 3Q24; overseas equipment　　expansion encouraging. The new engineering, equipment, and operation & maintenance contracts in 3Q24 rose 54%, 16%, and 27% YoY (vs. - 18%, -15%, and 41% YoY in 1H24), and new engineering and equipment contracts significantly accelerated, driving 1-3Q24 new contract value up 1% YoY (-9% in 1H24), which we attribute to the release of domestic engineering orders and rising equipment self-sufficiency.

New contracts for mine operation and maintenance rose 41% YoY in 3Q24 and 45% YoY in 1-3Q24, maintaining rapid growth. New overseas equipment contracts edged down 2% YoY in 3Q24 due to a high base, but new equipment contracts jumped 163% YoY, driving a 90% YoY increase in new equipment contracts in 1-3Q24. We expect self-sufficiency rate and earnings contribution of the overseas equipment business to rise.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts unchanged at Rmb3.42bn and Rmb3.90bn. The stock is trading at 8.0x 2024e and 7.0x 2025e P/E. We maintain an OUTPERFORM rating and target price of Rmb14.7, implying 11.4x 2024e and 10.0x 2025e P/E, offering 42.7% upside.

Risks

Disappointing progress in contract execution and/or growth of equipment and operation & maintenance businesses.