CAPOL INTERNATIONAL&ASSOCIATES(002949)：PREFABRICATED BUILDING BUSINESS MAINTAINS RAPID GROWTH;FOCUSES ON BIM APPLICATION

　　1H22 results slightly miss our forecast

    　　Capol International & Associates announced its 1H22 results: Revenue dropped 18% YoY to Rmb861mn, and attributable net profit rose 3.4% YoY to Rmb67.13mn. In 2Q22, revenue dropped 29% YoY to Rmb484mn, and attributable net profit dropped 2.3% YoY to Rmb70.94mn. The 1H22 results slightly missed our expectations due to a significant drop in revenue from the Engineering Procurement Construction (EPC) business.

    　　GM in 1H22 rose 5.2ppt YoY to 26.3%, and GM in 2Q22 rose 10.0ppt to 34.2% as revenue from the EPC business declined. In 1H22, the overall expense ratio increased 2.2ppt YoY to 15.6%. Selling, G&A, and R&D ratios rose 0.4ppt, 1.3ppt, and 0.8ppt YoY in 1H22. The financial expense ratio dropped 0.3ppt YoY in 1H22. Asset and credit impairment losses increased 77% YoY to Rmb34.41mn in 1H22, mainly due to an increase of Rmb17.49mn in provisions for contract asset impairment. Net margin improved 1.6ppt YoY to 7.8% in 1H22, while net margin in 2Q22 rose 4.1ppt YoY to 14.7%. Net operating cash outflow increased by Rmb24.07mn YoY to Rmb175mn in 1H22, and net investment cash inflow increased by Rmb36.54mn, owing to the firm’s increase in redemption of financial products.

    　　Trends to watch

    　　Revenue from prefabricated building design maintained high growth, which may support design business’ growth. In 1H22, the company's revenue from the design business increased 1.3% YoY to Rmb638mn. Of this, revenue from prefabricated building design increased 17.6% YoY to Rmb247mn, contributing most to the company's design revenue growth. In terms of new orders, in 1H22, the company’s prefabricated building business secured Rmb345mn in new orders, accounting for 44.1% of total revenue from the design business, up 9.9ppt YoY from the 2021 level (34.2% of total revenue in 2021). In 2022, the Ministry of Housing and Urban-Rural Development issued the 14th Five-Year Plan for developing the construction industry[1], proposing to develop prefabricated buildings. It pointed out that during 2021-2025, the proportion of prefabricated buildings in new developments should exceed 30%. We believe that as one of the earliest companies to carry out research on the prefabricated building business, the company has comprehensive competitiveness in prefabricated building design. As the penetration rate of prefabricated buildings rises, orders and revenue from the prefabricated building design business should increase, supporting the growth of the company's design business.

    　　Continued investment in BIM applications; smart-city project in Shenzhen to expand existing-home market. Following cooperation with Vanyitech and ZWSOFT in building information modelling (BIM) development and application, the company continues to promote the application of BIM technology. We estimate that in 1H22, the company's revenue from the BIM business as a percentage in total revenue kept rising. In June 2022, the 14th Five-Year Plan of Shenzhen Digital Government and Smart City[2] was released, in which the Shenzhen government proposed a benchmark project for a new international smart city by 2025 to improve the quality of and expand the capacity of the city's big data centers, government cloud services, and government network. In addition, we predict the BIM model utilization rate will reach 100% in essential building, municipal infrastructure, and water projects. We believe the demand for BIM construction in Shenzhen will grow, and the company will see additional growth in this business.

    　　Financials and valuation

    　　We maintain an OUTPERFORM rating. The stock is trading at 13x 2022e and 11x 2023e P/E. Considering the real estate market is under pressure, we cut our 2022 and 2023 earnings forecasts 12% and 12% to Rmb205mn and Rmb249mn. Considering the fall in market sentiment, we lower our target price 22% to Rmb18 (17x 2022e and 14x 2023e P/E), offering 33% upside.

    　　Risks

    　　Real estate regulations have longer-than-expected impact; disappointing application of BIM.