Three trees: committed companies, long-term activists
Sankeshu is one of the representatives of high-growth companies that consume building materials. Sankeshu is mainly engaged in wall coatings, supporting the development of adhesives, basic materials, waterproof materials, insulation boards, science and technology innovation boards, etc., accounting for about 60% of wall paint revenue. The company's revenue scale in 2023 was about 12.5 billion yuan. The compound revenue growth rate for 2013-2023 was about 29%, and revenue growth continued in the past five years. The compound revenue growth rate in 2018-2023 was about 28%, and even revenue in 2023 bucked the trend. In the past, the company continued to have high investment and high output, and achieved positive feedback over a period of ten years, but the divergence between investment and output in the past three years has made improving profitability an important task.
Capital expenditure front: High production capacity growth is the cornerstone of the expansion of the Sankeshu market. By the end of 2023, the company's production capacity for architectural coatings and waterproofing membranes will reach 4.6 million tons and 278 million square meters, which is expected to support more than 27 billion yuan. The current average capacity utilization rate is less than 40%. In addition, there are other businesses such as adhesives, basic materials, insulation boards, and science and technology innovation boards, further laying the foundation for revenue. As the company's capital expenditure slows down and revenue growth resumes, the company's balance ratio, financial rate, and transportation rate are all expected to improve.
High cost investment: Paint products are characterized by light assets on the production side and service attributes on the sales side. The construction of engineering and retail channels all depends on sales staff development. The compound growth rate of the company's sales staff reached 43% in 2017-2021. Assuming that it will take 2 years from investment to reasonable output, and the compound revenue growth rate in 2019-2023 is about 20%, so the high growth in sales staff in the early stages is not fully reflected on the revenue side, and there is plenty of room for increase in per capita output. The overall rate is showing a downward trend, but there is still significant room for the sales rate to decline.
It has reached the harvest period. Global paint leaders have excellent gross margin performance. The long-term gross margin center is around 40%. The gross margin of SKK and Nippon Paint Holdings fell to 30-35% during the downward cycle of Japanese real estate, and the gross margin center increased after PPG divested glass and glass fiber to focus on the paint business. Nippon China's operating margin center level in the past was 15%, and profitability recovered significantly in 2023. It was 9.1%, 7.4%, and 12.5% respectively in 2021-2023. Three trees followed Nippon and bucked the trend to raise net interest rates. There were slight results, but the gap was still large.
What kind of company did the investment make Sankeshu grow?
Industry pattern: Three trees have risen strongly. The paint industry is less concentrated, and the retail market is more concentrated. China's architectural coatings market pattern is relatively scattered, with total sales CR5 of about 30% and retail sales of CR5 of about 50%, which is significantly higher than the concentration of the architectural coatings engineering market. In the past ten years, Sankesu's revenue growth is clearly ahead of its peers, and its market share in the paint industry has increased markedly. It has become second in the architectural coatings market (market share about 8%) and second place in the retail market (market share about 9%).
Core competitiveness: Brand strength is gradually improving. The compound growth rate of Sankeshu's retail business revenue is about 22% since 2013, and the compound growth rate is about 31% since 2018. It has maintained steady growth over a long period of time, and the growth center has increased in recent years. With a deep understanding of paint consumption attributes, Sankeshu has seen initial results in recent years in marketing investment, product innovation (especially art paint), and channel layout (entering Tier 1 and 2 cities upward and laying out beautiful villages downward). Judging from retail product pricing, the structure is getting better and better, standing in the first tier. As can be seen, the long-term average price and gross margin of Sankeshu Home Furnishing Wall Paint is higher than that of other domestic brands, reflecting its differentiated brand positioning.
Core competitiveness: Perfect omni-channel layout. On the one hand, retail channels are becoming more mature, reflected in sinking channels (rapid development of the Beautiful Village Division) + category expansion (rapid increase in the support rate of auxiliary materials and waterproof coatings). On the other hand, the engineering business has been actively transformed, and distribution channels have been improved rapidly. Sankeshu Engineering's channel revenue has grown at a compound rate of about 31% since 2018. The engineering distribution channel has become the company's core driver. In the past few years, the company has vigorously developed engineering dealers, and the compound growth rate of the number of channel customers is close to 50%. The company's net profit for 2024-2025 is estimated to be 1 to 1.4 billion yuan, with a corresponding valuation of 22 or 16 times. It is a flexible high-quality leader.
Risk warning
1. The recovery of the real estate industry falls short of expectations; 2. Significant fluctuations in raw material prices; 3. Risk of collection of accounts receivable; 4. Risk that profit forecasts are unfounded or fall short of expectations.