Gypsum board's high market share, high ROE and cash flow provide the company with a solid base and development potential. The waterproofing and coating business bucked the trend during the downturn in the industry and accumulated huge explosive power for the future. Beixin Building Materials is the leader in the domestic gypsum board industry. Since 2019, it has promoted the “one, two wings, global layout” strategy. The main business is gypsum board with a domestic market share of more than 60%, an ROE of 15.1% in 2023, and a net operating cash flow of 4.73 billion yuan. The basic market is stable. At the same time, in the context of general contraction of industry enterprises, the company is expanding its waterproofing and coating business through endogenous and epitaxial methods, which will provide explosive growth during the recovery period. Currently, the company has more than 120 industrial bases at home and abroad. It is the world's largest gypsum board keel industry group, and the scale of the waterproofing business also ranks among the top three in the industry.

Gypsum board has outstanding cost advantages. Combined with channel and product advantages, it creates high market share, high ROE, and stable cash flow. The company took the lead in seizing advantageous locations to expand production, achieving optimal layout of factories, markets and resources, and strengthening cost advantages through scale effects, self-supply+collection of protective paper, energy saving and consumption reduction. At the end of 2022, the number of the company's dealers exceeded 10,000, including more than 4,000 county and township channels. The products covered all levels of low, middle and high levels, forming a strong barrier. Since 2020, it has maintained a market share of more than 60%. The company has control over gypsum board pricing power, can transfer cost pressure through price increases, and set prices close to the SME cost line to effectively block competitors to obtain stable excess profits. The gross margin of gypsum board has remained above 30% since 2013, and the average ROE has reached 16.4% since 2020. At the same time, it has created a stable cash flow under the distribution model, with an average net present ratio of 1.2 since 2021.

The expansion of the “Gypsum Board +” category has achieved remarkable results, and breakthroughs have been achieved in overseas business. Relying on the advantages of gypsum board brands, channels, resources and customers, the company extended to supporting products such as light steel keels, powder mortar, mineral wool board, etc. In 2023, the keel revenue was 2.29 billion yuan, with a gross profit margin of 18.7%. The total revenue of other products was 2.07 billion yuan, with a gross profit margin of 5.5%. At the same time, the company's overseas business has achieved a “0-1” breakthrough, with overseas revenue of 220 million yuan in 2023, an increase of 45.0% over the previous year, and a gross profit margin of 19.6%. In the future, in addition to the implementation of gypsum board projects, two-wing businesses such as waterproofing and coating will also be introduced, and the overseas market is expected to achieve “1-N” development.

The waterproof wing is making great strides, and the paint wing is on the rise. 1) Waterproofing: At present, the waterproof sector is on the right track. Under fluctuating real estate risks, the strategic position of high-quality central state-owned enterprise customers has greatly improved. As the only state-owned enterprise in the waterproofing industry, the company has a natural advantage in strategic cooperation with central state-owned enterprises. With scale expansion and brand collaboration, the company's waterproof business bucked the trend in 2023, achieving revenue of 3.9 billion yuan, a year-on-year increase of 24.1%, and net profit of 154 million yuan, turning a loss into profit. 2) Coatings: Revenue in 2023 was 390 million yuan, up 12.1% year on year, and gross profit margin was 28.9%. At the end of 2023, the company announced plans to acquire 78.34% of Gabrielle's shares. As an architectural coatings company with leading domestic brand power, the products, channels, and scale are all at the forefront of the industry. It is expected to make up for the company's paint shortcomings, and the “Paint Wing” will usher in leaps and bounds.

The initial equity incentive showed confidence in development and anchored high-quality development. At the end of 2023, the company announced its first equity incentive plan. It plans to grant 347 directors, senior management and core personnel no more than 12.9 million shares of restricted shares, accounting for 0.764% of the company's share capital. The incentive targets for withholding non-net profit for 2024-2026 are 4.265 billion yuan/6.164 billion yuan/6.473 billion yuan, respectively, with year-on-year growth rates of 22.0%/44.5%/5.0%, respectively. The growth target is high, highlighting the company's ambition under the “two wings in one, global layout” strategy.

Investment proposal: Considering the implementation of the Garbo acquisition and subsequent expansion of the waterproofing and coating business, the company is expected to achieve operating income of 27.54 billion yuan, 30.09 billion yuan, and 32.02 billion yuan in 2024-2026, achieving net profit of 4.30 billion yuan, 4.71 billion yuan, and 5.0 billion yuan. The three-year performance compound growth rate is 7.8%, corresponding to PE valuations of 11.1, 10.2, and 9.6 times, for the first time coverage.

Risk warning: the risk of a sharp decline in demand for completion, the risk that the decline in new construction is less than expected, the risk that raw fuel prices will continue to rise rapidly, and the risk of errors in assumptions and calculations.