Company Profile

Huida Sanitary Ware Co., Ltd. is a China-based company principally engaged in the design, research, development, manufacture and sales of sanitary products. The Company operates through three main segments. The Sanitary Wares segment is primarily involved in the design, manufacture and sales of sanitary ceramics, sanitary hardware fittings, bathtubs and bath cabinets. The Ceramic Tiles segment is mainly engaged in the manufacture and sales of interior wall tiles and floor tiles. The Other Business segment is primarily engaged in the interior design and decoration, gasoline and diesel retail, among others. （Source: Reuters）

Event

Huida Sanitary Ware （the company） announced its 2019 financial report, stating that it realized operating revenue of CNY 3.21 billion, up 10.7% from a year earlier; its net profit attributable to shareholders stood at CNY 329 million, rising 37.8% from the previous year; its net profit after deducting non-recurring items came in at CNY 273 million, a 31.06% growth from a year earlier; its EPS reached CNY 0.89. The company plans to distribute cash dividends of CNY 2.3 （including tax） for every 10 shares to all shareholders, with the dividend rate being 25.84%.

Comments

Revenue and profit realized a stable growth and its gross profit rose greatly.

The company made revenue of CNY 3.21bln, up 10.7% and 5.2pcts year-on-year （YoY）； its net profit attributable to shareholders was CNY 329mln, rising 37.8% YoY. Among which, the company received income of CNY 48.1439mln from long-term equity investment and financing income of CNY 14.2448mln, CNY 12.1580mln less from a year earlier; the net profit rose 26% compared with the same period last year after deducting the above two factors.

The combined gross margin in 2019 was 33.03%, up 4.68pcts from 2018, thanks to reducing costs and improving efficiency as well as scale effects.

The project business saw a fast growth and the cash flow showed a turnaround from the previous year.

Since 2018, the fast growth of refined decoration, overall renovation and suit renovation speeded up the changes of distribution channels, which impacted the conventional retail channel. The company, taking advantage of the industry trend, took active moves to expand new clients as well as maintaining the existing customers. At present, it has inked strategic cooperation agreements with such real estate developers as Poly, Vanke, Longhu, Yuanyang, Beijing Capital and Baoneng, and the businesses went smoothly. In 2019, the company made revenue of CNY 733mln from the project business, rising 36.23% YoY, accounting for 22.83% of the total.

The retail business also made its contributions with overseas sales recovering.

The company realized revenue of CNY 2.306bln from retail channels, an increase of 5.17% YoY, taking up 71.84% from the total revenue, with domestic sales making an obvious increase to restore a positive growth from a negative one in H119. We hold that the upbeat of the retail growth was mainly thanks to the company’s construction of the distribution channels. In the meantime, it accelerated to expand overseas markets, forging a marketing network connecting over 100 countries and areas like US, UK and Austrialia.

The accelerating expansion of production capacity facilitates mid-and long-term development.

In 2019, the company began to speed up production capacity expansion, with the sanitary ceramics phase two project, which has the annual output of 2.8 million units, putting into production in January 2019, which adds production capacity of 30% to 9 million units.

By the end of 2019, the projects in construction reached CNY 233mln, flat with that of 2018, maintaining a relatively high level.

Earnings forecast and investment recommendation

We revised the earnings forecasts, and the company is expected to realize net profit attributable to shareholders of CNY 390mln/CNY 460mln/CNY 530mln, implying a P/E ratio to be 9.5X/8.1X/7.0X, respectively, based on the closing price on March 19th 2020. We remain “Outperform” rating for the company.

Potential risks

worse-than-expected decline in demand; slower-than-expected expansion of new businesses