Core views:

The company released its three-quarter report for 2023. 23Q1-3 revenue was 2,388 million yuan, +2.47% year-on-year, net profit of 81 million yuan, +15.67%, net profit of non-reversed net profit of 72 million yuan, +130.28% year-on-year; of these, Q3 revenue was 902 million yuan, -1.73%, net profit of 41.77 million yuan, +11.21% year-on-year, and net profit of 39.98 million yuan, +32.73% year-on-year.

The main business of construction and coating and insulation panels is steady, waterproofing is high, and traditional insulation is actively shrinking. By category, 23Q1-3 architectural coating/building energy-saving materials/waterproof materials revenue was 16.5/49/190 million yuan, with a year-on-year growth rate of +2%/-10%/+84% respectively, of which the Q3 growth rates were -2%/-18%/+99% respectively.

The main building coatings industry is steady. The double-digit decline in revenue from energy-saving building materials is mainly due to active contraction of traditional insulation materials (Q1-3 revenue -45%), while insulation board revenue with high gross margin achieved double-digit growth (Q1-3 revenue +10% year-on-year). The rapid release of proprietary waterproof production capacity and high growth at a low base is expected to continue.

The gross margin for a single quarter declined month-on-month, the expense ratio was well controlled, and impairment affected profits. 23Q1-3 had a gross profit margin of 32.44%, a year-on-year +0.65pct, Q3 single-quarter gross profit margin 29.94%, y-2.76pct, and -3.49pct. The cumulative year-on-year increase was mainly due to a decline in raw material prices, but the decline in average sales prices and changes in business structure caused Q3 gross margin to decline over the same period; 23Q1-3 fee rate was 23.03%, year-on-year -4.18pct. The sharp decline was mainly due to a decrease in sales staff; 23Q1-3 credit impairment loss- 103 million yuan, compared to -23.85 million yuan for the same period last year. Our judgment is mainly due to extended accounts and few new items added.

There was a significant improvement in cash flow, and accounts receivable decreased year over year.

Profit forecasts and investment advice. We expect net profit of 120 to 250 million yuan in 23-24, corresponding to the current market value of 31.06 and 15.25 times PE. Referring to comparable companies, a reasonable valuation judgment of 20xPE in '24 was given, corresponding to a reasonable value of 11.54 yuan/share, maintaining a “buy” rating.

Risk warning. The development of the Small B channel fell short of expectations, the price of raw materials fluctuated beyond expectations, and the collaborative development of the “coating protection” business fell short of expectations.