On Sunday, UBS downgraded Gongniu Group Co Ltd (603195:CH) to Neutral from Buy, adjusting the price target to RMB64.50 from RMB83.00. The firm anticipates a slowdown in demand for China's sockets and switches, which form a significant portion of Gongniu's sales and profits, as the residential Gross Floor Area (GFA) completions are expected to decline in the first half of 2024. The reduced demand is not likely to be compensated by market share gains, according to UBS.
The analyst from UBS projects that Gongniu's Earnings Per Share (EPS) Compound Annual Growth Rate (CAGR) will moderate to 8% during 2024-2026, a decrease from the 19% seen from 2020-2023. The expected deceleration in growth is attributed to potential margin risks and a trend of consumers opting for lower-priced goods. Despite these challenges, the stock's Price/Earnings to Growth (PEG) ratio is trading at a premium, which UBS believes is warranted by Gongniu's superior and improving Return on Equity (ROE) and a higher payout ratio.
Gongniu's ROE is projected to increase by 2.3 percentage points to 27.6% in 2024 since its Initial Public Offering (IPO) in 2020, outpacing its peers, which average around 20%. Additionally, the company's payout ratio is expected to be approximately 70% in 2023, up from an average of 55% during 2020-2022. This financial strategy may support the company's valuation despite the anticipated moderation in growth.
UBS also notes that Gongniu's expansion into new categories, such as Electric Vehicle (EV) chargers, could provide an upside to earnings. This diversification is seen as a positive development for the company as it seeks to tap into new markets and revenue streams. The firm's revised stance on Gongniu reflects a cautious outlook on the company's core business, balanced by recognition of its financial strength and strategic initiatives.
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