Incident: In the first quarter of 2024, the company achieved revenue of 7.149 billion yuan (-4.61%), net profit to mother of 348 million yuan (-9.81%), and net profit of non-return to mother of 310 million yuan (-4.39%).

Driven by the decline in real estate, Q1 revenue performance declined slightly year over year. Entering '24, the real estate industry as a whole was still under pressure. In Q1, the country's real estate development investment fell 9.5% year on year, and real estate sales/new construction fell 19.4%/27.8% year on year respectively. The operating pressure on housing enterprises increased, demand in the real estate chain continued to be under pressure, and the company's revenue performance declined slightly in the first quarter. Currently, in the downturn cycle of the real estate and industrial chain, the company is actively making strategic adjustments, and the engineering business is accelerating the decline in the integrated company channel and increasing the share of channel business. At the same time, the C-side retail business represented by Civil Construction Group, D&W paint retail sales, and construction repair group Yuhong Home Service maintained steady growth. In 2023, the company's retail business revenue was about 9.287 billion yuan, up 28.11% year-on-year, accounting for 28.29% of total revenue; strategically, the company continues to firmly explore the retail market and channel side customers. The increase in the company's retail business share is conducive to optimizing cash flow and increasing the share of the company's retail business Quality of operations. The price of asphalt, the main raw material on the Q1 cost side, continued to decline. Taking the price of resold asphalt in Shandong as an example, the average price in Q1 was about 3,537 yuan/ton, down about 3% year on year and 2.3% month on month. The decline in raw material prices helped repair the company's gross margin. 24Q1 company's gross margin was about 29.68%, up 1 pct year on year, up about 6.67 pct year on year.

The company's net operating cash flow improved year-on-year in Q1 in '24, and the growth rate of accounts receivable was lower than the growth rate of revenue. The company's net operating cash flow in the first quarter of 2024 was about -1,889 billion yuan, with a year-on-year decrease of about 1.917 billion yuan, mainly a year-on-year decrease of 2.14 billion yuan in cash payments related to operating activities, and the 24Q1 revenue ratio was 1.03x, a year-on-year decrease of 0.07x; the company's significant year-on-year improvement in Q1 operating activity was mainly due to the company increasing channel changes, increasing the share of distribution and retail sales, optimizing direct sales, and improving repayment conditions; at the end of the first quarter of 2024, the total decline in the company's accounts receivable and notes receivable declined year-on-year 6.58%, lower than the revenue growth rate during the same period. Other accounts receivable were 4.357 billion yuan, an increase of about 280 million yuan over the end of last year. Mainly due to the expansion of the company's business scale, the margin size increased accordingly. At the end of Q1 2024, the company's book capital was 5.191 billion yuan, and the balance ratio was 40.27%, down about 3.6 pcts from the end of last year. Sufficient monetary capital provided a strong guarantee for the company's production and operation.

The 24Q1 credit impairment was about 185 million yuan, and the fee rate for the period was about 20.39%. In the first quarter of 2024, the company accrued credit impairment of about 185 million yuan. We determined that accounts receivable were mainly depreciated according to account age, which affected current performance; as the market environment weakened and pressured, the company also actively adjusted its accounts receivable strategy, reduced tolerance during the reconciliation period, continued to strengthen accounts receivable repayment efforts and reduce the risk of bad debts; the company's expense ratio for the first quarter was 20.39%, an increase of about 1 pct over the previous year, with sales/management expense ratios rising by about 0.5/0.25 pcts respectively.

Diversified product development to build a comprehensive building materials group. On the basis of its main business in building waterproof materials, the company vigorously develops product development in various fields such as architectural decorative coatings, special mortar, construction powder, building energy saving and insulation, construction engineering repair services and upstream materials such as nonwovens and VAE emulsions. Relying on the sales channels and customer resources accumulated over many years of waterproof materials, the company has built a comprehensive building materials group with multiple product layouts. The company is working hard and gaining momentum in the business sector represented by Sand Powder Technology and Hongsheng New Energy; in '23, the company achieved revenue of about 4.2 billion yuan, a year-on-year increase of 40%, gross margin of about 27.56%, and an increase of 4.67 pcts over the previous year. Relying on the company's mature channels and strong execution, it is expected to continue to maintain steady growth in 24 years, bringing new performance growth points to the company.

Investment advice: In the downward cycle of the industry, the company, as a leader in the waterproof industry, accelerates channel transformation and diversified business development to withstand the risk of stalling in a single category. Judging from the business situation, the company's strategic adjustments have begun to bear fruit, the quality of operation has improved steadily, and the company's performance will progress further after the real estate bottoms out; considering the demand pressure brought about by short-term real estate bottoming out, we maintained the company's net profit of 29.05, 35.63 and 4.371 billion yuan respectively for 24-26, corresponding EPS of 1.15, 1.41, and 1.74 yuan, corresponding to PE valuation It was 11.3, 9.2, and 7.5 times, respectively, maintaining the “buy” rating.

Risk warning: Prices of raw materials continue to rise, and cost pressure increases; real estate investment falls far short of expectations; industry competition intensifies, corporate expansion progress falls short of expectations; environmental regulations are relaxed, and production capacity withdrawal falls short of expectations.