KINLONG HARDWARE PRODUCTS(002791)：RESULTS RECOVER STEADILY;WATCH EARNINGS UPSIDE DRIVEN BY REVENUE GROWTH

　　3Q23 results in line with our expectations　　Kinlong Hardware Products (Kinlong) announced its 1-3Q23 results: Revenue rose 2.6% YoY to Rmb5.55bn, and net profit grew Rmb140mn to Rmb144mn. In 3Q23, revenue increased 1.53% YoY to Rmb2.19bn and net profit grew 46.5% YoY to Rmb131mn, largely in line with our expectations.　　1) Demand pressure persists; revenue remains solid: Kinlong’s　　revenue remained solid (rising 1.5% YoY) in 3Q23, despite falling demand from the real estate industry. We estimate that 3Q23 revenue from door and window hardware and door control products fell by mid-single digits YoY, while revenue from other architectural hardware products grew about 30% YoY. By region, the firm’s revenue remained largely stable YoY in provincial capitals and prefecture-level cities in 1-3Q23, its YoY revenue growth in counties exceeded 10%, and that in overseas markets was in the high single digits. 2) Steady recovery in GM: Prices of aluminum alloy, stainless steel and zinc alloy (major raw materials) fell slightly QoQ, driving the firm's GM up 0.3ppt QoQ to 32.2% in 3Q23.　　3) Expenses remain largely stable; operating profit expands along with gross profit; net margin recovers: In 3Q23, selling and financial　　expense ratios fell 1.3ppt and 0.4ppt YoY to 14.8% and 0.5%, and G&A and R&D expense ratios increased 0.2ppt and 0.1ppt YoY to 4.7% and 3.6%. Overall expense ratio dropped 1.4ppt YoY and 0.7ppt QoQ. As a result, 3Q23 expenses rose only about 7% compared with 2Q23.　　Operating profit grew Rmb50.76mn as gross profit expanded Rmb61.68mn QoQ, with operating profit margin up 1.9ppt QoQ to 6.9% (up 2.1ppt YoY), driving net margin up 1.8ppt YoY to 6% (up 2.5ppt QoQ).　　4) Sound cash flow and asset structure: In 3Q23, receivables rose　　Rmb129mn QoQ, and payables grew Rmb43mn QoQ. In 1-3Q23, cash- to-revenue ratio rose 3.7ppt YoY to 108.4% (vs. 105% in 3Q23), and net operating cash flow was -Rmb97.61mn. The firm’s debt-to-asset ratio fell 2.6ppt YoY to 48.6% in 3Q23, and net cash was positive.　　Trends to watch Operating quality remains solid; watch earnings upside driven by　　revenue growth. We believe Kinlong now strictly controls project risks,　　reducing real estate projects. It focuses on entering lower-tier markets in counties, and develops new product categories and scenarios to transform its revenue structure (counties accounted for more than 20% of total revenue in 1-3Q23, up over 10% YoY). Looking ahead, as revenue contribution from counties increases with growth staying high, we expect the firm’s revenue growth to accelerate. Meanwhile, as expenses are likely to remain stable, we believe the firm’s labor efficiency will improve and earnings may grow rapidly.　　Financials and valuation　　We keep our 2023 and 2024 net profit forecasts unchanged at Rmb271mn and Rmb568mn. The stock is trading at 54x 2023e and 26x 2024e P/E.　　We maintain OUTPERFORM rating. Considering the low risk appetite in the market, we cut our target price 21% to Rmb55, implying 31x 2024e P/E, implying 22% upside.　　Risks　　Weaker-than-expected recovery in demand from completed property projects; improvement in labor efficiency disappoints; expansion into new regions disappoints. 【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。