It is a leader in building decoration, and the trend is rising at an inflection point in business. The company is a leading enterprise in the decoration industry. Since its establishment, the company has insisted on promoting industrial upgrading in the decoration industry. It was listed on the Shenzhen Stock Exchange in 2010. The company's performance recovered steadily. In 2023, H1's current order amount increased to 15.508 billion yuan, and the amount of new orders signed increased to 7.36 billion yuan, an increase of 7.29% over the previous year. Among them, the growth rate of residential decoration was remarkable, 137.57% over the same period. The company's R&D investment continued to increase, from 241 million yuan in 18-22 to 371 million yuan, and sales rates were effectively controlled. The company's business is mainly concentrated in East China. In 2022, revenue in East China reached more than 7.3 billion yuan, accounting for more than 60% of total revenue.

Building decoration has the characteristics of a “big industry, small enterprise”. The industry is clear, and the winner is king. According to the China Decoration Association and Intelligent Research, the market size of China's decoration industry is 4.6 trillion yuan. It is a large industry, and decoration usually needs to be replaced in 8-10 years, and the industry is highly sustainable. In terms of industry enterprises, small and medium-sized enterprises occupy a large market. According to the 2022 revenue scale, the industry CR6 is only 1.34%. After facing the downside risk test of real estate, the industry is in the clearing stage. Leading companies that can win in a high-profile market environment will have an increasingly obvious trend of increasing concentration, and in the end, the winner will be king. The curtain wall industry has a market size of over 550 billion yuan. Although the growth rate of the curtain wall industry has slowed in 2022, BIPV will bring incremental market to curtain walls with demand for renewal and energy saving and environmental protection.

Urban village renovation is naturally compatible with prefabricated models, and prefabricated welcome machines. Urban village renovation is a systematic project with large development investment and a long industrial chain; it also has the difficulties of short cycle, large volume, small wet work surface, and uncontrollable decoration quality, and the characteristics and advantages of the prefabricated process effectively solve the aforementioned pain points. According to Prefabricated Building Network and Intelligent Research Consulting, prefabricated decoration has significant advantages over traditional decoration. The construction period is reduced by 80% compared to traditional decoration, the amount of labor used has been reduced by 60%, and materials have been reduced by 60% to 70%. The increase is remarkable, and consumer acceptance is high. Therefore, urban village renovation is naturally compatible with prefabricated decoration, and our urban village renovation will stimulate a large amount of prefabricated demand. In June 2022, the Ministry of Housing and Construction issued an implementation plan clearly proposing to promote green and low-carbon construction and vigorously develop prefabricated buildings. By 2030, prefabricated buildings would account for 40% of newly built urban buildings in that year (about 24.5% in '21). Hangzhou issued an “Opinion” in July indicating that this proportion will reach 40% in 2027, and there is plenty of room for future improvement.

Actively pioneering multiple growth curves, leading the construction informatization layout. 1) Intelligent building sector: From 2018 to 2022, Wanan's overall revenue continued to grow, from 572 million yuan to 924 million yuan, with a CAGR of 12.74%. Among them, Wanan's main product was a comprehensive operation management platform for intelligent buildings, which mainly consists of three parts: foggy sky, wuyu, and three-dimensional visual digital twins. 2) BIPV sector: The company has achieved strategic cooperation with China's leading architectural photovoltaic application leaders. The order amount for integrated building photovoltaic projects that have won bids in 2022 was 340,000 million yuan, an increase of 1021.32% over the same period last year. 3) 3D printing sector: The company takes a stake in Yingchuang Technology (23.52%), a leading global 3D architectural printing company. According to Yingchuang's official website, it uses Yingchuang's “ink” technology to “turn waste into treasure”.

Investment advice. We expect that in 2023-2025, the company's revenue will be 135.89/ 150.36/ 16.683 billion yuan, a year-on-year growth rate of 12.2%/10.7%/11.0%, a year-on-year net profit of 467/ 5.94/724 million yuan, a year-on-year increase of 150.6%/27.3%/21.7%; EPS 0.35/ 0.44/ 0.54 yuan, corresponding to 5.04 yuan on July 28 at a closing price of 14.47/11.36/ 9.33x PE. The first coverage gives a “buy” rating.

Risk warning

Fixed investment falls short of expectations, promotion of prefabricated building policies falls short of expectations, development of intelligent building products falls short of expectations, and systemic risks.