3Q23 results miss our expectations GETO New Materials announced its 3Q23 results: In 1-3Q23, revenuerose 22.30% YoY to Rmb1.59bn, while attributable net profit fell 99.74% YoY to Rmb329,740. In 3Q23, revenue rose 11.59% YoY to Rmb580mn, while attributable net profit fell 162.08% YoY to -Rmb35.21mn. The results missed our expectations, as 1) unit rental prices for aluminum formworks and protective platforms fell due to weak downstream demand and fiercer competition, and 2) the payment period of accounts receivable was extended, and the company made large bad debt provisions in 3Q23.

1) Aluminum formwork business under pressure. In 1-3Q23, weestimate that revenue of the company's aluminum formwork business grew about 10% YoY, slower than in 1H23, mainly due to 1) weak demand from the real estate industry's new starts in China, 2) slower aluminum formwork rental revenue growth, and 3) falling rental prices. Meanwhile, aluminum formwork sales also decelerated in some overseas markets due to overseas holidays.

2) Climbing frames weighed heavily on the firm. The occupancy rate ofthe firm's climbing frame business dropped due to the new regulatory requirements for climbing frame products in Guangdong province's construction market. We estimate that revenue from the climbing frame business grew by mid-to-high single digits YoY in 1-3Q23. Meanwhile, depreciation costs and transportation costs to regions outside Guangdong rose. GM fell significantly, and profitability was under pressure. 3)Prefabricated concrete (PC) products performed well. In 1-3Q23, thePC product business maintained high growth thanks to capacity expansion and rising capacity utilization rate, and we estimate that its revenue should have doubled YoY.

4) In 3Q23, GM fell QoQ, and expenses rose significantly, with netprofit turning negative. GM fell 8.2ppt QoQ to 20.1% (-12.7ppt YoY) in 3Q23 due to falling rental prices of aluminum formworks and high climbing frame costs. The blended expense ratio rose 4.7ppt YoY to 21.9%, with selling, G&A, R&D, and financial expense ratios rising 1.4ppt, 1.5ppt, 0.2ppt, and 1.6ppt YoY to 7.2%, 5.5%, 5.9%, and 3.4%. In 3Q23, credit　　impairment losses increased 89.2% YoY to Rmb29.71mn. This dragged 3Q23 net margin by 17ppt YoY to -6.1%.

5) Cash flow was under pressure due to the market’s tight capitalcondition. In 3Q23, accounts receivable rose Rmb148mn compared with 1H23 (up Rmb346mn from end-2022). As a result, the firm’s cash-to- revenue ratio fell 7ppt YoY to 78% in 1-3Q23 (vs. 76% in 3Q23), and operating cash in 1-3Q23 was -Rmb225mn.

Trends to watch

Lots of companies exited the market amid falling prices; the firm isimproving its internal strengths. According to the report from China Construction Materials Rental Contractor Association, there were nearly 400 companies in the aluminum formwork industry as of 1H23, more than 200 fewer than in 2022. Meanwhile, the industry's aluminum formwork ownership fell 6.4% from the end of 2022 to 65.6mn sqm. As aluminum formwork prices remain low, we expect the exit of aluminum formwork companies to accelerate due to the high exit returns and high entry costs.

We expect the real estate industry’s new starts to gradually recover and aluminum formwork orders to rebound. The firm is also improving its internal strengths and increasing efforts to improve production and sales processes to reduce costs and improve efficiency.

Financials and valuation

As downstream demand and prices remain under pressure, we cut our 2023 and 2024 net profit forecasts 92% and 44% to Rmb11mn and Rmb118mn. The stock is trading at 31x 2024e P/E. We maintain OUTPERFORM rating and considering that the industry has gradually bottomed out, we only cut our target price 20% to Rmb16.8 (35x 2024e P/E), implying 12% upside.

Risks

Risks of intensifying competition; continued decline in demand; increasing bad debts from accounts receivable.