Description of the event

The company released its three-quarter report: 2023Q1-3 revenue was 2.39 billion yuan, up 2% year on year, and imputed net profit was 81 million yuan, up 16% year on year. 2023Q3 revenue was 900 million yuan, down 2% year on year, and imputed net profit was 42 million yuan, up 11% year on year.

Incident comments

The volume of architectural coatings has increased and the price has decreased, and waterproofing continues to grow rapidly. The company's revenue in the first three quarters increased by 2% year-on-year. Among them, the revenue of architectural coatings, thermal insulation and energy saving, and waterproof materials accounted for 70%, 21%, and 8% respectively, and the corresponding revenue growth rates were 2%, -10%, and 84% respectively. Architectural coatings remained stable, and the waterproofing business grew significantly. Looking at the third quarter alone, the company's revenue fell 2% year on year. Among them, the revenue growth rates for architectural coatings, thermal insulation and energy efficiency, and waterproof materials were -2%, -18%, and 99%, respectively, and waterproofing grew rapidly. Focusing on architectural coatings, engineering paint revenue in the third quarter accounted for 80% of total construction coatings, engineering paint revenue fell 3% year over year (sales volume increased 17% year over year); home improvement paint revenue increased 7% year over year (sales volume increased 9% year over year); and ancillary materials revenue was flat year over year (sales volume increased 6% year over year). The downward pressure on engineering paint prices was even greater. The average price in the 3rd quarter was about 4.24 yuan/kg, down 17% year on year, down 12% month on month, while the average price of home improvement coatings fell only 2% year on year in the 3rd quarter. Focusing on the waterproof business, the company has maintained a relatively rapid growth rate since this year, with a year-on-year increase of 75% in the first half of the year, and continued to accelerate in the third quarter, with a year-on-year increase of 99%.

Engineering paint prices declined, and gross margin was under pressure month-on-month. The company's gross margin for the first three quarters was about 32.4%, up 0.6 percentage points year on year; the expenses rate for the first three quarters was about 23.0%, down 4.2 percentage points year on year. Among them, sales, management, R&D, and financial expense rates changed -3.5, -0.9, -0.2, and +0.4 percentage points, respectively, but credit impairment losses were about 103 million yuan, up about 79 million yuan year on year. In the end, the company's net interest rate for the first three quarters was about 3.4%, up 0.4 percentage points year on year.

Looking at the third quarter alone, gross margin was about 30%, down 2.8 percentage points year on year and 3.5 percentage points month on month. The core of the decline in profitability was the sharp drop in engineering paint prices, while raw material prices rebounded slightly month-on-month and the year-on-year decline narrowed (the average prices of emulsion raw materials butyl acrylate, styrene, and titanium dioxide for the third quarter changed -5%, -9%, and -8%, respectively, and +10% month-on-month, respectively). The company's expenses for the third quarter period were about 20.5%, down 4.0 percentage points year on year. Among them, sales, management, R&D, and financial expense rates changed -3.3, -2.2, +0.6, and +0.8 percentage points, respectively. In addition, the company estimated credit impairment losses of about 30 million yuan in the third quarter, about the same level as the previous year. In the end, the company's net interest rate for the third quarter was about 4.6%, up 0.5 percentage points from the previous year and down 0.9 percentage points from the previous month.

There has been an improvement in operating cash flow. The net cash flow from the company's operating activities in the first three quarters was about 0.7 billion yuan, which is the first time in nearly four years that it has been corrected in the first three quarters. The net to cash ratio reached 0.81, or due to declining raw material prices, companies adjusted their payment strategies, and the payout ratio improved significantly, from 1.55 to 0.98; however, the payout ratio has not improved yet, falling from 1.08 to 0.95, or mainly due to an increase in the share of direct sales this year. The amount of notes and accounts receivable of the company at the end of the third quarter was about 2.39 billion yuan, about the same as the previous year.

The company continues to optimize channels, and urban villages and guaranteed housing construction are expected to bring new opportunities to the industry. We believe that the company's performance is expected to improve. It is estimated that the company's net profit for 2023-2024 will be 120 to 220 million yuan, with a corresponding valuation of 32 or 17 times.

Risk warning

1. The recovery of the real estate industry fell short of expectations;

2. Prices of raw materials fluctuate greatly.