1H24 results slightly miss our and market expectations

Huatie Emergency Equipment Science & Technology (Huatie) announced its 1H24 results: Revenue rose 22% YoY to Rmb2.36bn; net profit attributable to shareholders grew 3% YoY to Rmb335mn; recurring net profit rose 10% YoY to about Rmb333mn. In 2Q24, revenue rose 14% YoY to Rmb1.25bn, and attributable net profit fell 3.5% YoY to Rmb178mn.

Recurring net profit fell 0.24% YoY to Rmb174mn. The firm’s 1H24 results slightly missed our and market expectations, mainly due to pressure on the operation of the aerial work platform (AWP) business.

Revenue maintained rapid growth, with the firm's AWP business continuing to expand. The number of AWPs under management increased by 48% YoY, reaching 151,300 units at the end of 1H24 (up from +30,000 units at the end of 2023). However, the occupancy rate declined by 6ppt YoY to 76% in 1H24, due to pressure on certain demand scenarios and weather disruptions. Despite this, revenue from the AWP business grew by 33% YoY to Rmb1.78bn in 1H24. For other businesses, we estimate that revenue from other segments decreased by 3% YoY in 1H24.

GM declined slightly. Blended GM decreased by 1.5ppt YoY to 43% in 2Q24 (remaining largely flat QoQ), as the occupancy rate and rental prices of AWP came under pressure.

Rising financial expenses increased the overall expense ratio. In 2Q24, most of the firm's expenses were diluted by revenue growth, with the selling, G&A, and R&D expense ratios falling by 0.3ppt, 0.6ppt, and rising by 0.4ppt YoY. However, financial expenses increased by 35% YoY to Rmb136mn, driving the financial expense ratio up by 1.6ppt YoY to 10.8%.

Net margin fell slightly. Due to the impact of GM and expense ratio, net margin fell 2.6ppt YoY to 14.2% in 2Q24 (flat QoQ compared with 1Q24).

Operating cash flow improved. The firm's cash-to-revenue ratio rose 6.3ppt YoY to 88% in 1H24, resulting in net operating cash flow rising 83% YoY to Rmb1.15bn in 1H24.

High debt ratio. In 1H24, the firm's net debt increased about Rmb560mn from end-2023 to Rmb11.84bn, implying a net gearing ratio of 196%.

Trends to watch

Rapid consolidation of the AWP industry in China; the firm has received strong support from a state-owned investor. Looking ahead, we believe the AWP industry will continue to bottom out over the next 1-2 years, as the rapid increase in domestic AWP supply has exerted mounting pressure on occupancy rates and prices, and small and medium-sized enterprises in the industry have struggled to survive. The firm completed a change in its controlling shareholder in July, with Hainan Haikong Industrial Investment becoming the new controlling shareholder. Moving forward, the firm plans to leverage Hainan Haikong Industrial Investment’s 3A rating to reduce financing costs, enhance economies of scale, and advance strategies such as expanding into emerging industries and overseas expansion.

Financials and valuation

We cut our 2024 and 2025 net profit forecasts 17% and 25% to Rmb860mn and Rmb987mn. The stock is trading at 10x 2024e and 9x 2025e P/E. We maintain OUTPERFORM. Given falling risk appetite in the market, we cut our target price 29% to Rmb5.5, implying 12.6x 2024e and 11x 2025e P/E and offering 21% upside.

Risks

Lower leasing prices due to intensifying competition; soft downstream demand; cash flow management risk.