1H24 results in line with our expectations

China Design Group announced its 1H24 results: Revenue fell 26% YoY to Rmb1.66bn and net profit attributable to shareholders fell 41% YoY to Rmb154mn. In 2Q24, revenue fell 36% YoY to Rmb871mn and net profit attributable to shareholders fell 63% YoY to Rmb61.01mn. The firm's 1H24 results are in line with our expectations.

Overall revenue faced significant downward pressure. In 1H24, revenue from the firm's main business declined due to falling market demand and intensifying competition. By product, revenue from planning & research, survey & design, comprehensive testing, digital & intelligent business, and low-carbon & environmental services fell 18%, 34%, 17%, 9%, and 5% YoY.

Overall gross margin remained solid thanks to effective cost control. In 1H24, the firm's overall gross margin fell only 0.4ppt YoY to 36.4%, remaining solid despite falling revenue and unfavorable market conditions. Gross margin of the firm's core business - survey and design (accounting for about 50% of total revenue in 1H24) - rose 1.1ppt YoY to 41.6% in 1H24, and gross margin of its low-carbon and environmental protection business rose 17.7ppt YoY to 37.8%, largely offsetting the impact of declined gross margin of other businesses.

Expense ratio increased YoY. In 1H24, the firm's SG&A and R&D expense ratios totaled about 21.4%, up 3ppt YoY. Specifically, selling, G&A and R&D expense ratios grew 1.5ppt, 0.5ppt and 1.2ppt YoY.

Impairment narrowed. The firm's provisions for asset and credit impairment losses totaled about Rmb62.76mn in 1H24, down Rmb31.33mn YoY.

Cash flow came under pressure. In 1H24, the firm's net operating cash flow was -Rmb635mn, widened about Rmb376mn YoY. The firm's cash flow came under pressure in 1H24 due to a shortage of funds in downstream industries and relatively rigid cash payment for procurement.

Trends to watch

Survey & design business highly competitive; demand to recover in 2H24. In 1H24, revenue from the survey & design business narrowed by about one-third due to weak downstream demand, but gross margin of the　business edged up YoY thanks to effective cost cuts. In 1H24, the firm's new contract value maintained relatively stable YoY growth, and its expansion outside Jiangsu progressed smoothly. Looking ahead, we believe the firm's core survey & design business will remain competitive, and its revenue and profit contribution will increase further in 2H24.

Financials and valuation

Given the industry headwind, we lower our revenue and gross margin assumptions and cut our 2024 attributable net profit forecast 37% to Rmb521mn and introduce 2025 attributable net profit forecast of Rmb604mn. The stock is trading at 10x 2024e and 8x 2025e P/E. We maintain an OUTPERFORM rating. Considering the firm's smooth expansion into new fields and relatively low valuation, we maintain our target price of Rmb9.4, implying 12x 2024e and 11x 2025e P/E, offering 27% upside.

Risks

Revenue recognition for design business disappoints; competition intensifies.