The Zhitong Finance App learned that China Merchants Securities released a research report saying that judging from the boost in demand for building materials, there is still a certain transmission cycle from policies to real estate sales to entry and repayment of building materials, but it is conducive to improving the market's expectations for subsequent fundamental restoration of building materials companies. Valuation repairs may take precedence over fundamentals. In terms of categories, the consumer building materials category benefits more than the bulk category. 1) The previous advance model for consumer building materials seriously eroded corporate profits, and there is plenty of room for valuation and performance repair; 2) in the short term, the stock housing market is better than the new housing market, which is more favorable to the post-delivery cycle of the building materials category. Judging from the 23Q4-24Q1 performance, the internal performance differentiation of consumer building materials has intensified, and the competitive advantages of leading companies with improved distribution channels and rich product categories have become more prominent, taking the lead in recovering profitability and improving cash flow.

The main views of China Merchants Securities are as follows:

Real estate support policies are in the spring breeze, and the Chengdu New Deal has further boosted sentiment

Local real estate optimization policies are frequent. For example, in the “Notice on Policies and Measures to Further Optimize the Stable and Healthy Development of the Real Estate Market” issued by the Chengdu Housing and Construction Bureau on 4/28, it is stated that from 2024/4/29, “housing transactions within the city will no longer be reviewed for housing purchase eligibility, commercial housing projects in the city will no longer carry out notarized housing selection and will be sold independently by enterprises”, and the liberalization of purchase restrictions in Chengdu has further strengthened the market's expectations of policies to promote the removal of commercial housing from inventory. However, the implementation of the supply-side “white list” has also had a positive impact on the real estate financing side.

The three major projects will continue to advance as major strategic plans. In 24Q1, 500 billion yuan of PSL was disbursed, providing medium- to long-term low-cost financial support for policy development banks to issue loans for the “Three Major Projects” construction projects. According to data from the National Bureau of Statistics, in the first quarter, the “three major projects” boosted investment in real estate development by 0.6 percentage points. The demand for stock refurbishment also favors the entire chain of building materials categories from start to completion.

The real estate chain is being adjusted, and expectations of policy strengthening still exist. The three main aspects of downstream building materials: infrastructure engineering, real estate, and C-side retail

1) Infrastructure investment remains resilient: From January to March 2024, the cumulative year-on-year ratio of infrastructure fixed investment in the broad/narrow sense was +8.8%/+6.5%, and in March alone, the year-on-year ratio was +8.6%/+6.6%.

2) The new real estate market continues to adjust, with second-hand housing taking the lead in weak repair: from January to March 2024, cumulative real estate development investment was -9.5%, compared to -16.8% in March; cumulative sales area/sales amount of commercial housing was -19.4%/-27.6% year-on-year in January-March, -23.7%/-28.5% year-on-year in March; cumulative year-on-year ratio of new housing starting/construction/completion area in January-March was -28.4%/-11.1%/-20.7%, respectively. The monthly housing sentiment index was 92.07, weakening further.

Compared to the new housing market, the second-hand housing market is recovering. In March, sales volume of newly built commercial homes and second-hand homes in 70 large and medium-sized cities increased compared to the previous period; second-hand residential sales prices in first-tier cities fell 0.7% month-on-month, and 0.1 percentage points narrower than the previous month; second-hand residential sales prices in second- and third-tier cities all fell 0.5% month-on-month, and the declines were all 0.1 percentage points narrower than the previous month.

3) The C-side retail market for building materials has recovered: from January to March 2024, the cumulative retail sales volume of construction and decoration materials products was 38.69 billion yuan, +2.4% year-on-year. Retail sales in March alone were 14.81 billion yuan, +2.8% year-on-year.

Investment advice: We recommend high-quality faucets that show alpha value. Weixing New Materials (002372.SZ), a leading pipe manufacturer with steady growth in performance and high dividends; Beijin Construction (000786.SZ), the main gypsum board business with high bargaining power, steady rise in market share, gradual improvement in waterproof coating layout, and outstanding performance; Mona Lisa (002918.SZ), a high-quality ceramic tile brand with improved profitability and cash flow bottom, cost reduction and cost control effectiveness; The share of sinking is increasing, and the share of intelligent products continues to increase in sanitary ware Leading Wrigley Home (001322.SZ); AstraZeneng (603378.SH), a paint leader with integrated product supply and construction capabilities, and a high reach rate for old renovation projects.

Risk warning: Real estate and infrastructure investment has declined sharply, macroeconomic fluctuation risks, raw materials and fuel costs have risen sharply, policy implementation falls short of expectations, and risk of impairment of accounts receivable.