China Uton Holdings (08232 HK)announced 1Q-3Qresults, revenue increased 40.7% YoY to RMB179 million,net profit decreased 8.1% YoY to RMB27.1 million. We think the revenue growth was slightly aboveexpectation, while net profitdecline was more than expected.The below expected results were mainly due to1)overall gross margin dropped substantially by 10.5 ppts YoYto 36.6%, mainly due to a substantial part of fiber opticsdeployment business was in the commencement phase, only revenue and cost were recognized but not gross profit; 2)the gross margin of the previously signed contracts of the two newly acquired companies based in Chongqing andHunan was low.We think as the deployment progressed and those lower margin contracts are completed, overall grossmargin would rebound significantly in 4Q; we expect overall gross margin should bounce back toapproximately 40%forFY13.In addition, administrative expensesnearly doubled to RMB25 million, slightly higher than expected.We expectas the Company continues to expand, administrative expenses should increase by 20% CAGR. Finance costsincreased 3.4x to RMB4.5 million(interest bearing debt substantially increased), but didn’t exceed expectation.
Compared with 31stDecember 2012, as at 30thSeptember 2013, trade receivables dropped 2.3% to RMB89.6 million,as customers repaid faster.Amounts due from customers for contract work increased 76.1% to RMB246 million, whichwas mainly due to uncompleted contract work amount increased substantially as at 30thSeptember 2013,andcustomers delayed the certifyingof projects.As the Company’s main customers were the big three telecom operators,bad debt risk should be very low,there should be at most more finance costs (working capital financing). As at 30thSeptember, the Company’s total borrowings amounted to RMB79.4 million, including RMB62.9 million of bank loan andother borrowings, RMB8.6 million loanfrom related party, and RMB7.9 million of long term bonds. Restricted bankdeposits plus cash and bank deposits amounted to RMB100.0 million, still in net cash position.Operating cashoutflow increased 1.1x YoY to RMB60.9 million, mainly due to substantial increase in amounts due fromcustomers for contract work.As a substantial amount of projects would be completed, certified and repaidduring4Q, we expect cash flow should improve significantly.
Historically, 1Q-3Q12 revenue and net profit only accounted for 52% and 45% ofFY12 revenue and net profitrespectively.From the revenue structure andconstructionprogress for 2013, 1Q-3Q13 revenue and net profit may onlyaccount for 45% and 35% of FY13 revenue and net profit respectively,meaning that FY13 revenue and net profit couldreach RMB398 million and RMB77.5 million, which should exceed expected revenue of RMB344 million and close toexpected net profit of RMB81 million.We think therefore with a lower than expected1Q-3Q result,full year profit targetcouldstill maintain.Current valuation reflects 13.8x/10.0x/7.8x FY13/FY14/FY15 PER, with a EPS CAGR of 25% inthe next three year, the valuation does not appear high.MaintainTP of HKD1.05 and“Accumulate”rating.