2021 results in line with our forecast

KDT Machinery announced its 2021 results: Revenue and attributable net profit rose 40% and 48% YoY to Rmb2.37bn and Rmb520mn, in line with our forecasts. In 4Q21, revenue and attributable net profit fell 0.3% and 15% YoY to Rmb512mn and Rmb90mn. In 1Q22, revenue rose 6.5% YoY to Rmb543mn and attributable net profit fell 5% YoY to Rmb106mn, mainly due to slower capacity expansion at furniture manufacturers as a result of falling sales volume of properties.

Major products maintain rapid growth in 2021; overall GM rises slightly. In 2021, the firm’s revenue from numeric control edge banding machines, numeric control drilling machines, panels, and processing centers rose 43%, 27%, 29%, and 17% YoY to Rmb970mn, Rmb497mn, Rmb334mn, and Rmb332mn. In 2021, the firm’s economies of scale offset the pressure from rising raw material prices. Overall gross margin (GM) edged up 0.3ppt YoY to 33.1%. GM of numeric control edge banding machines, panels, and processing centers declined 2.0ppt, 3.4ppt, and 0.5ppt YoY to 44.6%, 29.3%, and 17.0%; GM of numeric control drilling machines increased 2.9ppt YoY to 26.7%.

Net margin edges up; cash flow grows steadily. In 2021, the firm’s period expense ratio declined YoY. Selling and financial expense ratios dropped 0.6ppt and 0.2ppt YoY, while R&D expense ratio increased 0.3ppt YoY. In 2021, net margin rose 1.1ppt YoY to 21.9%, while operating cash inflow grew Rmb136mn YoY to Rmb551mn.

Trends to watch

Demand from real estate market to decline in the short term; upbeat on import substitution of furniture machinery in the medium-to-long term. Since 3Q21, the gross floor area (GFA) of commercial properties sold and new starts showed monthly double-digit declines, weighing on market demand for furniture and capacity expansion at furniture manufacturers. In 1Q22, GFA of commercial properties sold and new starts fell 13.8% and 17.5% YoY. Furniture manufacturers’ demand for furniture machinery remained largely flat. With the improvements in the precision, efficiency, and service life of domestic machinery, mid-range to high-end furniture machinery still has ample growth potential for import substitution.

Enhancement of self-production of components and expansion of production capacity. In recent years, the company acquired or held a stake in Danchi Precision Technology Co., Ltd., Guangzhou Mesedge System Technology Co., Ltd., and Guangzhou Zsrobot Intelligent Equipment Co., Ltd., enhancing automated and intelligent production capacity in core components, software, and other aspects. In March, the firm unveiled its private placement plan to issue no more than Rmb1bn in shares, and the firm’s actual controller intends to buy Rmb150-400mn in shares with cash. The company plans to invest Rmb400mn in an automated production line utilizing furniture robots and Rmb500mn in a high-end intelligent equipment manufacturing base, both in Shunde, and to increase cash flow by Rmb100mn.

Financials and valuation

Given the real estate industry downturn, we lower our 2022 EPS forecast 22% to Rmb1.74 and introduce our 2023 EPS forecast of Rmb1.99. The stock is trading at 11.3x 2022e and 9.9x 2023e P/E. Considering earnings forecast revisions and valuations impacted by the real estate market, we cut our target price 30% to Rmb26.12 (implying 15.0x 2022e and 13.2x 2023e P/E), offering 33% upside. Maintain OUTPERFORM.

Risks

Disappointing capacity expansion at furniture manufacturers due to downward pressure in the real estate market.