Core views:

The company publishes its semi-annual report. In the first half of 2023, revenue was 1,487 billion yuan, +5.20% year on year, and net profit of return to parent was 39.21 million yuan, +20.85% year on year. Among them, Q2 revenue was 995 million yuan, +7.56% year on year, and net profit from parent was 55.17 million yuan, or -21.73% year on year. The decline in profit in a single quarter was mainly due to an increase in bad debt preparation, while gross margin improved markedly, and cash flow improved sharply.

Construction and coating growth is steady, insulation, decorative panels and waterproofing have increased, and Big B has benefited from Baojiao Building. By category, 23H1 building coatings/building energy-saving materials/waterproof materials revenue was 10.4/2.9/110 million yuan, respectively, with a growth rate of +3.8%/-3.5%/+74.6%, actively shrinking traditional insulation materials (-50%), while insulation decorative boards increased (+28%), achieving high growth under a low waterproof base; from a channel perspective, C-end/small B/big B accounted for 4%/75%/20%. The growth rate was +2%/+0.2%/+30%, and the share of big B increased, mainly due to the increase in the proportion of buildings that have been paid in cash. project.

The gross margin of construction and coating increased year-on-year, the cost ratio dropped sharply, and the extended age of accounts affected profits. The gross profit margin of 23H1 was 33.95%, +2.74%, of which the gross margin of architectural coating/building energy-saving materials/waterproof materials was 40.75%/17.58%/4.78%, year-on-year, +5.97/-1.76/-4.78%, respectively. The sharp improvement in gross margin of construction coating was mainly due to the decline in prices of raw materials such as emulsion and titanium dioxide; the cost rate during the 23H1 period was 24.53%, year-on-year -4.40pct. Among them, the sales cost rate was -3.76pct, mainly from -25% of sales remuneration; 23H1 credit impairment Loss -71.38 million yuan, compared to +8.01 million yuan for the same period last year. There were not many new accruals for individual items, mainly due to extended account age; 23H1 net interest rate was 2.6%, year-on-year +0.34 pct, and Q2 net interest rate 5.5%, year-on-year -2.08 pct.

Cash flow was positive, performance was the best for the same period in history, and accounts receivable declined.

Profit forecasts and investment recommendations. We expect net profit of 23-24 to be 230-32 million yuan, and the current market value corresponds to 18.8 or 13.7 times PE. We maintain a reasonable valuation judgment of 25x PE in '23, corresponding to a reasonable value of 13.52 yuan/share, and maintain a “buy” rating.

Risk warning. Little B's channel development fell short of expectations, raw material prices fluctuated more than expected, and “defended”

The collaborative development of the business fell short of expectations.