Interpretation of Shanghai Industrial Holdings' Interim Report: Filtering Out the "Noise" Without Changing the Long-term Growth Foundation

"If you don't plan to hold a stock for ten years, you shouldn't even think about holding it for ten minutes." This value investment maxim by Warren Buffett has been vividly confirmed in the stock price movement and capital flow of SHANGHAI IND H (00363).

According to Zhitong Finance APP, the stock price of SHANGHAI IND H began an upward trend after hitting a low of HKD 5.18 in October 2022, reaching a maximum of HKD 15.32 by August 2025, with a maximum increase of 195.8% during this period. The recognition from the capital side is also clear; since the beginning of this year, southbound funds have shown a generally upward trend in their holdings of SHANGHAI IND H, with the number of shares held exceeding 64 million in August, raising the holding ratio to 5.9%. The dual improvement of stock price and capital essentially reflects the market's "real money" vote, recognizing the company's long-term value across cycles.

Long-term investors can achieve such stable returns primarily by buying targets with long-term value at reasonable prices. Investors who initially positioned in SHANGHAI IND H recognized its diversified business's risk resistance and stable dividend expectations, which allowed them to seize this round of gains. Secondly, it is crucial to avoid "noise" interference during long-term holding. The so-called "noise" refers to information or factors that do not reflect the intrinsic value of the enterprise but can easily disrupt rational decision-making.

Recently, "noise" has emerged. The mid-term performance report disclosed by SHANGHAI IND H shows that in the first half of the year, the company achieved revenue of HKD 9.476 billion, a year-on-year decrease of 8.6%; the net profit attributable to shareholders was HKD 1.042 billion, a year-on-year decrease of 13.2%. Affected by the performance, the stock price of SHANGHAI IND H adjusted in the short term along with the market. From an investor's perspective, if one wants to maintain confidence in long-term holdings, the key is to penetrate the data appearance of declining revenue and profit to clarify whether the risks shaking long-term value lie behind the data or if they are merely "noise" affecting short-term investment sentiment.

Non-operational Factors Lead to Short-term Performance Pressure

According to the financial report, the decline in revenue and profit for SHANGHAI IND H in the first half of the year was mainly due to a decrease in the turnover of real estate projects compared to the same period last year and significant provisions for impairment of real estate inventory and a decrease in the fair value of investment properties.

The cyclical pressure on the real estate business is the main factor dragging down performance. In the first half of the year, the domestic real estate industry was still in a transformation phase of "de-stocking and structural adjustment," with a year-on-year decrease in the turnover of completed projects. At the same time, based on prudent accounting principles, SHANGHAI IND H made a total impairment provision of HKD 1.15 billion for certain project inventories and investment properties, which lowered the overall profit level.

It is worth noting that such impairments are common actions in the industry, with many real estate companies experiencing profit fluctuations due to similar adjustments during the same period. SHANGHAI IND H's response has been proactive; in July, the company recouped RMB 2.05 billion by selling three real estate assets in Quanzhou, optimizing its asset structure and creating space for subsequent focus on core regional layouts Looking ahead, despite the continuous efforts of domestic economic stabilization policies and the marginal improvement signals in the real estate industry, the market has not yet shown significant recovery. The future development of Shanghai Industrial Holdings' real estate business still requires further observation. The company's management stated at the mid-term performance release that they will focus on two aspects to promote the development of the real estate business: on one hand, focusing on urban renewal in core cities, actively seeking quality opportunities in key areas such as Shanghai; on the other hand, by issuing Real Estate Investment Trusts (REITs), further enhancing the asset management capabilities and property management levels of the real estate business.

Zhito Finance APP noted that the short-term accounting impact brought by the privatization of Yuefeng Environmental Protection is another major reason for the decline in Shanghai Industrial Holdings' profits in the first half of the year.

In the infrastructure and environmental protection business under Shanghai Industrial Holdings, due to Yuefeng Environmental Protection completing its privatization in May 2025, all 475 million shares of Yuefeng Environmental Protection indirectly held by Shanghai Industrial Holdings were canceled at a price of HKD 4.9 per share, and the exchangeable bonds were redeemed early, with a total amount of approximately HKD 1.7 billion for principal, interest, and early redemption compensation, recovering approximately HKD 4 billion in cash. Although there was a loss of HKD 56.83 million this period due to the sale of equity, this result stems from the impact of accounting methods. The company uses the equity method for accounting, and the performance fluctuations of Yuefeng Environmental Protection during the long-term holding period were not directly included in profits, but this also led to a relatively high cost base when selling the equity, resulting in short-term accounting losses.

If we set aside short-term accounting fluctuations, the long-term investment return of the Yuefeng Environmental Protection project is significant. The management of Shanghai Industrial Holdings stated that since investing in Yuefeng Environmental Protection, the income obtained through dividends over the years has exceeded 50% of the initial investment, combined with the HKD 4 billion cash recovered from this privatization, the overall investment return rate is quite considerable.

This investment case fully reflects Shanghai Industrial Holdings' strategy of "long-term layout and value investment," which does not pursue short-term stock price fluctuation gains but instead aims to achieve stable dividends and asset appreciation returns through long-term holding of quality assets, ultimately realizing good investment returns. Industrial Securities pointed out in their research report that the company has optimized its cash flow structure through asset disposal, which not only improves cash flow but also provides assurance for subsequent business expansion and dividends.

Optimizing Financial Structure, Stable Dividends Reflect Long-term Confidence

Zhito Finance APP noted that in the first half of the year, Shanghai Industrial Holdings maintained a high level of cash and cash equivalents at HKD 28.5 billion. The company makes reasonable use of funds, focusing on strengthening sustainable development capabilities. On the liability side, as of the end of June 2025, the company's interest-bearing liabilities decreased to HKD 58.51 billion, a reduction of HKD 1 billion compared to the end of 2024; the net debt ratio fell from 65.12% at the end of 2024 to 60.99% at the end of June 2025, with the liability structure continuously optimized.

At the same time, the company's financing costs significantly decreased by 15% to HKD 875 million, which is attributed to the reduction in the scale of interest-bearing liabilities and is closely related to the decline in market interest rates and the optimization of the company's financing structure. Guosen Securities' research report analysis believes that with the further decline in domestic and overseas interest rates, Shanghai Industrial Holdings' financing costs still have room for reduction, which will further alleviate financial burdens and enhance profitability Abundant cash flow provides a solid "safety cushion" for dividends, enabling Shanghai Industrial Holdings to deliver high-quality returns to shareholders. In the first half of 2025, the company declared a dividend of 42 Hong Kong cents per share, unchanged from the same period last year, with a total dividend amount of HKD 457 million. The dividend payout ratio increased from 38% in the same period last year to 43.8%. The company's decision to maintain dividends and increase the payout ratio during a short-term performance adjustment period highlights its commitment to shareholders and reflects the management's confidence in its business prospects, providing important support for long-term investors.

A "cyclical complementarity" business ecosystem builds a risk-resistant moat

The long-term investment value of Shanghai Industrial Holdings lies in the cyclical complementarity of its different business segments, which is particularly evident in the first half of 2025. When the real estate business faces cyclical pressure, the counter-cyclical nature of the infrastructure and environmental protection business becomes a stabilizing "ballast" for profits; the consumer goods business, with its growth attributes, serves as a profit growth engine, thus forming a hedging effect of "support during downturns and incremental growth during upturns." This risk resistance brought about by cyclical complementarity is difficult for single-business companies to achieve and provides fundamental support for maintaining stable dividends and long-term development in a complex market environment.

Specifically, the infrastructure and environmental protection business contributed a net profit of HKD 933 million in the first half of the year, accounting for 92.2% of the company's net profit.

In detail, Shanghai Environment, as the core platform for the company's water and environmental protection business, achieved revenue of RMB 3.177 billion in the first half of the year, with a net profit attributable to the parent company of RMB 344 million, a year-on-year increase of 7.1%. The profit growth of Shanghai Environment is mainly attributed to the optimization of its financing structure, with financial expenses decreasing by 12.5% year-on-year. The toll road business continues to bring stable cash flow to the company, achieving toll revenue of HKD 1.019 billion in the first half of the year, with a net profit of HKD 548 million, representing year-on-year growth of 5.1% and 0.5%, respectively.

The consumer goods business achieved a net profit of HKD 403 million in the first half of the year, a year-on-year increase of 26.0%, accounting for 39.8% of the company's net profit. Among them, Nanyang Tobacco performed particularly well, achieving sales of 746,000 cases, a year-on-year increase of 31.1%; it generated revenue of HKD 1.273 billion and a net profit of HKD 337 million, representing year-on-year growth of 16.4% and 20.0%, respectively. The health business achieved a net profit of HKD 141 million in the first half of the year, a substantial year-on-year increase of 118.4%. This growth is mainly due to the outstanding performance of Shanghai Pharmaceuticals, which achieved a net profit of RMB 834 million during the period, a year-on-year increase of 39.5%.

Looking ahead to the second half of 2025 and long-term development, Shanghai Industrial Holdings is expected to continue focusing on core sectors and optimizing its business structure, leveraging multiple policy opportunities to achieve steady growth and continuous value enhancement For example, in the water and environmental protection sector, the national emphasis on ecological and environmental protection is continuously increasing, and the market demand in areas such as sewage treatment and solid waste management is steadily growing. The company, with its leading industry position and rich project reserves, is expected to further expand its market share. Under the "dual carbon" goals, the environmental protection infrastructure industry is ushering in long-term development opportunities, and companies with technological and resource advantages will fully benefit. Shanghai Industrial Holdings' layout in the environmental protection field aligns with this long-term trend.

The consumer goods business will continue to promote the overseas market expansion of Nanyang Tobacco, especially in the duty-free channel layout, while also driving Yongfa Printing to transform into high value-added areas such as cigarette packaging, pharmaceutical packaging, and e-cigarette packaging. The health business will leverage the resource advantages of Shanghai Pharmaceuticals Group to further expand investment opportunities in the medical and health fields, cultivating new growth poles.

From an investment perspective, the company will provide funding support for subsequent layouts of new quality projects through cash recovered from asset disposals. The management stated that it will continue to adhere to the "value investment" philosophy, seeking quality investment targets in infrastructure, environmental protection, and consumer sectors, achieving asset preservation and appreciation through long-term holding and refined management, thereby creating higher investment returns for shareholders.

In summary, from the mid-2025 performance perspective, although Shanghai Industrial Holdings' performance is temporarily affected by short-term adjustments and impairment provisions in the real estate business, the core business segments are performing steadily, and the financial situation continues to optimize. The long-term investment return and dividend capability remain attractive. The "ballast" role of the infrastructure and environmental protection business, the "growth engine" effect of the consumer goods business, the continuous improvement of the financial structure, and the stable dividend policy together constitute the company's core competitiveness. With the continued implementation of domestic economic stabilization policies and the company's focus and optimization of core businesses, Shanghai Industrial Holdings is expected to achieve long-term stable development