Incident: The company disclosed its 2024 quarterly report, achieving operating income of 818 million yuan, a year-on-year decrease of 25.72%; net profit to mother of 9.635 million yuan, an increase of 39.63% year on year; after deducting non-net profit of 8.7697 million yuan, an increase of 32.32% year on year. The company disclosed its 2023 annual report, achieving operating income of 5.921 billion yuan, a year-on-year decrease of 4.94%; net profit to mother of 266 million yuan, an increase of 169.93%; deducted non-net profit of 242 million yuan, an increase of 157.65% over the previous year. Comments on this are as follows:

Performance growth improved in Q1 in '24, and profitability continued to improve. Q1 The company's distribution revenue was 582 million yuan, down 15.01% year on year; engineering strategy business revenue was 236 million yuan, down 43.35% year on year. The gross margin/net margin of Q1 Company was 26.51/0.92% respectively, with year-on-year changes of +2.00/-0.10pct. This is mainly due to the company's continuous implementation of cost reduction and efficiency measures, and the results are gradually showing. The company's net operating cash flow was 278.704 million yuan, an increase of 117.11% over the previous year, mainly due to a decrease in the amount of supply chain factoring and commercial money orders due in the current period compared to the same period last year. The company's cost rate for the period was 25.76%, an increase of 4.35pct over the previous year. Among them, the sales/management (including R&D) /finance expense ratios were 7.85/15.76/ 2.16%, respectively, with year-on-year changes of +0.72/+3.64/0 pct.

The distribution side continued to gain strength, and profitability improved year over year. In 2023, the company's revenue fell 4.94% year on year to 5.921 billion yuan, mainly due to the decline in engineering business. The company's net profit to mother increased 169.93% year over year to 266 million yuan, mainly due to impairment losses and reduced expenses. In 2023, the company's asset+credit impairment losses were 225 million yuan, a year-on-year decrease of 63%. 1) Due to impairment charges, Q4 performance was temporarily under pressure. Q4 The company's revenue was 1,376 billion yuan, down 10.36% year on year; net profit to mother - 67.1712 million yuan, down 467.46% year on year; deducted non-net profit - 95.548 million yuan, down 100.78% year on year. Q4 The company's asset+credit impairment losses were 202 million yuan, an increase of 153% over the previous year, dragging down current results. 2) There has been a steady increase in distributor-side revenue. By product, in 2023, the company's revenue for porcelain glazed tiles/non-porcelain glazed tiles/ceramic panels and thin ceramic tiles was 45.24/5.47/688 million yuan respectively, with year-on-year changes of +1.63/-23.21/ -6.78%. By sales model, distribution channel revenue was 3.827 billion yuan, up 6.17% year on year, accounting for 64.63% of revenue, up 6.76 pct year on year. The revenue from the strategic engineering channel was 2,094 billion yuan, a year-on-year decrease of 20.21%, accounting for 35.37% of revenue. 3) Significant improvement in profitability. In 2023, with the price of raw fuels such as coal and natural gas falling, the company's profitability increased. The gross margin/net margin was 29.51/5.36%, respectively, up 5.86/10.93 pct year-on-year.

Among them, the gross margins of porcelain glazed tiles/non-porcelain glazed tiles/ceramic plates and thin ceramic tiles were 30.65/19.84/ 30.95%, respectively, an increase of 6.90/4.55/1.41 pct over the previous year. 4) Cash flow is improving, and the results of reducing costs and increasing efficiency are remarkable. In 2023, the company's net operating cash flow was 934 million yuan, an increase of 55.15% over the previous year, mainly due to increased profit for the current period, strengthened control of costs and expenses, reduced costs and expenses; optimization of payment settlement methods, factoring in the maturing supply chain, and reduction in acceptance amounts for maturing commercial drafts.

The company's expenses rate for the period was 19.18%, down 1.28pct year on year. Among them, the sales/management (including R&D) /finance expense ratios were 6.41/11.25/ 1.52%, with year-on-year changes of -1.86/+0.30/+0.28pct, respectively.

The market share bucked the trend, and the strong leading companies continued to strengthen. According to data from the China Building Sanitary Ceramics Association, in 2023, the country's ceramic tile production continued its downward trend, reaching 6.73 billion square meters, down 8.0% year on year. The number of enterprises above the size of the building ceramics industry was 1,022, a decrease of 4 compared to 2022. In 2023, the company's sales volume of building ceramics products was 149 million square meters, up 0.46% year on year, and its market share bucked the trend.

The company currently has four production bases in Foshan, Qingyuan, Tengxian and Gao'an. It has a rich product range and production capacity advantages. According to the company's annual report, in 2024, the industry's production capacity is expected to remain between 6-6.5 billion square meters, and the market is still in a state where supply exceeds demand. Some uncompetitive enterprises, brands and factories will gradually be eliminated. Leading companies have advantages in products, technology, costs, brands, etc., and will face greater development opportunities.

Investment advice: Turn a loss into a profit for the full year, continue to strengthen the distribution business, and maintain an increase in holdings rating. The company's net profit from 2024 to 2026 is expected to reach 428, 4.77, and 545 million yuan, respectively, up 61%, 12%, and 14% year-on-year, respectively, corresponding to PE valuations 11, 10, and 8 times. The company is a pioneer and leader in the industry of ceramic slabs and rock slabs. It is a first-tier brand in the industry and has obvious competitive advantages; continuing the strategy of sinking distribution channels, the distribution side is expected to maintain good growth; reducing costs and improving quality and efficiency are expected to improve the quality of operations.

Risk warning: raw material and fuel costs may rise above expectations; downstream demand falls short of expectations; accounts receivable risk; capacity release schedule falls short of expectations, etc.