1H23 results miss our expectations

GETO New Materials announced its 1H23 results: Revenue rose 29.4% YoY to Rmb1.01bn, and net profit attributable to shareholders declined 49.79% YoY to Rmb35.54mn. In 2Q23, revenue increased 22% YoY to Rmb632mn, and attributable net profit fell 49% YoY to Rmb33.7mn.

Earnings missed our expectations, as: 1） Rentals of aluminum molds and protective platforms declined amid weak demand and intensified competition; and 2） expense ratio increased. Higher financial expenses following the issuance of convertible bonds and equity incentive share payment in 2Q23 pushed up the firm’s expense ratio.

Revenue increased rapidly despite headwinds; sales volume of aluminum molds rose markedly. In 1H23, revenue continued to how rapid growth. Specifically, revenue of the aluminum mold business jumped 22% YoY to Rmb658mn. Revenue of the overseas aluminum business climbed more than 80% YoY, and revenue of the domestic aluminum mold leasing business increased around 10% YoY. Revenue of the protective platform business rose 13% YoY to Rmb85.54mn. Revenue of the prefabricated concrete business climbed 85% YoY to Rmb126mn. Revenue of the scrap sales business increased 61% YoY to Rmb119mn.

GM slightly dropped. Rentals of aluminum molds and protective platforms dropped in 1H23, as: 1） Demand declined amid economic downturn and weakness in the real estate industry; and 2） competition intensified. In 1H23, GM came in at 31% for aluminum molds （down 5.5ppt YoY）， 4% for protective platforms （down 3.9ppt YoY）， 19% for prefabricated concrete （up 2.2ppt YoY）， and 25% for scrap （down 8.0ppt YoY）。

Period expense ratio rose due to higher financial expenses; net profit margin came under pressure. In 1H23, selling expense ratio rose 0.6ppt YoY to 7.3%, G&A expense ratio increased 0.1ppt YoY to 5.3%, and financial expense ratio rose 1.2ppt YoY to 6.5% （due to recognition of convertible bonds）。 Net profit margin fell 5.5ppt YoY to 3.5% due to higher expense ratios （net profit margin dropped 7.3ppt YoY in 2Q23 to 5.3%）。

AR turnover days increased; operating cash flow came under

pressure: In 1H23, accounts receivable （AR） turnover days increased 67 days YoY to 194 days. The cash-to-receipt ratio dropped 5.2ppt YoY to 79%. Operating cash outflows fell Rmb70mn to Rmb132mn.

Gearing ratio rose. As interest-bearing liabilities increased to Rmb1.6bn in 1H23 from Rmb1.2bn at end-2022, the firm's gearing ratio reached 64.9% in 1H23 （up 3.5ppt from end-2022）。 Net gearing ratio increased to 54% in 1H23.

Trends to watch Competition intensifies; recovery in earnings takes time. In our opinion, demand for aluminum molds is correlated to engineering projects in the real estate industry. Rentals of aluminum molds have declined due to limited GFA new starts and weak demand in the real estate industry as well as intensified competition in the aluminum mold leasing industry. We believe earnings of aluminum molds will gradually increase following recovery in new-home sales, higher GFA new starts, and exit of less competitive companies in the aluminum mold industry.

Financials and valuation

We cut our net profit forecasts 44% to Rmb139mn for 2023 and 44% to Rmb212mn for 2024 to reflect weak demand and decline in rentals. The stock is trading at 32x 2023e and 21x 2024e P/E. We maintain an OUTPERFORM rating, but cut our ex-rights target price 30% to Rmb21.

Our TP implies 38x 2023e and 24x 2024e P/E, offering 17% upside.

Risks

Tougher competition; weak demand; higher AR.