Event: in the first half of 2023, the company realized operating income of 4.337 billion yuan (+ 4.73%), net profit of 61 million yuan (- 75.21%), net profit of 53 million yuan (- 69.84%), of which Q2 realized revenue of 2.47 billion yuan (+ 2.67%), net profit of 3 million yuan (- 98.26%) and net profit of 12 million yuan (- 86.95%).

The impairment provision in the second quarter affects the current performance. The company's Q1 and Q2 revenue growth rates were 7.59% and 2.67% respectively, and the home net profit growth rates were-41.37% and-98.26% respectively. On the one hand, the decline in performance was due to the macroeconomic pressure in the second quarter and the downward drag on industry demand due to data such as real estate sales. On the other hand, as the impairment provision of the company in the first half of the year affected the current performance, 23H1's assets and credit impairment was about 161 million yuan, and the asset disposal loss was about 20 million yuan. From a sub-business point of view, the company's waterproof roll income decreased by 4.77% in the first half, and its gross profit margin was about 19.91%, down 1.9% from the same period last year. The revenue of waterproof coatings increased by 20.49% over the same period last year, mainly due to the company's efforts in home improvement channels, launching the brands of "Keshun building materials" and "Keshun repair", and strengthening market expansion, with a gross profit margin of about 24.92%, an increase of 0.42% over the same period last year. The increase in the gross profit margin of waterproof coatings is mainly due to the decline in the price of raw materials such as emulsions. Revenue from waterproofing construction increased by 3.86% over the same period last year, with a gross profit margin of about 16.31%, down 8.12% from the same period last year. Fengze, a subsidiary of the company, achieved 222 million yuan in revenue in the first half of the year, an increase of about 48% over the same period last year, and a net profit of about 13.83 million.

Operating net cash flow remained under pressure in the first half of the year, and the growth rate of accounts receivable was lower than that of revenue growth. In the first half of 2023, the net operating cash flow of the company was-754 million yuan, which was 76 million yuan more than that of the same period last year, of which the net outflow of Q2 was 97 million yuan, while the net inflow of Q2 in the same period last year was 420 million yuan. The income-to-cash ratio of 23Q2 Company was 0.83x, a decrease of about 0.06x over the same period last year. In the first half of the year, the real estate repayment conditions did not improve significantly, and the cash flow pressure still existed. At the end of the second quarter of 2023, the company's accounts receivable and bills receivable increased by 2.2% compared with the same period last year, lower than the revenue growth rate in the same period, while other receivables were 376 million yuan, an increase of 90 million yuan over the beginning of the year. At the end of 2023H1, the company's book currency capital was 1.842 billion yuan, and the asset-liability ratio was 59.26%, an increase of 3.71 pct over the beginning of the year.

The 23Q2 credit impairment is about 123 million yuan, and the expense rate is about 14.1%. The company's credit impairment in the first half of the year is about 155 million yuan, of which Q2 impairment is about 123 million yuan, mainly due to the impairment of accounts receivable according to the age of the account. With the increase of the operating pressure of the real estate enterprises, the company's tolerance for the account period decreases, strengthens the recovery of accounts receivable, reduces the risk of bad debts, and unloads the burden and carries it light. The expense rate of Q2 company during the period was 14.07%, an increase of about 1.72 pct over the same period last year, of which the sales expense rate increased by 1.32 pct, mainly due to the company's efforts to expand the home decoration market, increased investment in brands and channels, and the management expense rate was relatively stable.

2.198 billion convertible bonds hit the ground, contributing to a new round of growth. The 2.198 billion plan for the company to issue convertible bonds has been approved by the Securities Regulatory Commission, and has been successfully issued and listed. The funds raised are mainly used for the expansion of the production base, the original factory intelligent transformation project and some supplementary liquidity. We believe that the smooth placement of investment funds will, on the one hand, provide financial guarantee for the company's future capital increase and production expansion, and at the same time effectively improve the company's production efficiency, reduce manufacturing costs, and meet the concept of green development. and timely alleviate the capital needs brought about by the rapid development of the company's business. This refinancing will serve as an opportunity for the company to set sail again, consolidate and expand the company's leading position and influence in the field of waterproof materials, and lay a solid foundation for the realization of the company's long-term planning.

Investment advice: taking into account the downward pressure on real estate in the first half of the year and the impact of the company's impairment provision on the performance, we adjusted the company's parent net profit from 2023 to 2025 to 3.97,6.75 and 947 million yuan respectively, corresponding to EPS 0.34,0.57 and 0.88.The corresponding PE valuation is 25.2, 14.8 and 10.6 times, respectively. Maintain the "buy" rating. The rise exceeded expectations, and the withdrawal progress of backward production capacity was not as expected.

Risk hint: real estate investment has fallen sharply, new industry regulations have fallen short of expectations, and raw material prices have risen sharply.