First-mover advantage+continuous refinement, creating a leader in polymer waterproof materials. Established in 2011, Karen Co., Ltd. is a national high-tech enterprise integrating R&D, manufacturing, sales and construction services of waterproof materials. On October 26, 2017, the company achieved an A-share listing, becoming the first GEM listed company in China's construction waterproofing industry. The company's main products include MBP, PVC, TPO waterproof membranes, TMP fusion tiles and other high-quality waterproof materials with industry technical originality. By implementing differentiated competitive strategies for polymer waterproof materials, it is leading the new trend in the application of polymer waterproof materials. Since 2023, the company has gradually broken out of the performance trough brought about by the decline in real estate, and the growth engine has been restarted. In 2023, the company achieved operating income of 2,801 billion yuan, +31.63% over the same period last year, and achieved net profit of 23 million yuan, or +114.24% over the same period last year.

The strictest new waterproof regulations in history have been implemented, and it is estimated that the waterproof market is expected to expand by more than 61%. The new waterproof regulations were officially implemented on April 1, 2023, and are the first general specification for the waterproofing industry. While improving industry standards, the new waterproof regulations are expected to directly drive the amount of waterproof materials used. According to the regulatory revenue scale, the waterproof market reached 119.214 billion yuan in 2022. According to our conservative estimates, without considering the growth of the market itself, the implementation of the new waterproof regulations alone will bring about an increase of more than 73.5 billion yuan in market size, a significant increase of 61.70% over 2022. After the implementation of the new regulations, product quality is more guaranteed. The market share of small and micro enterprises that produce non-standard products and that do not meet environmental protection standards may be cleared, and the competitive environment in the market is expected to improve. In this context, the competitiveness of large waterproof enterprises is expected to gradually increase, and industry concentration is expected to increase further.

Refined tracks+strict risk control to help the company recover its performance. 1) Deeply cultivate the polymer membrane circuit and focus on differentiated competition: Compared with other waterproof membranes, polymer membranes are resistant to corrosion, aging, have a long service life, and are suitable for photovoltaic roofs, and are the mainstream direction for future global waterproof membrane development. Polymer waterproof products are the representative business card of Karen Co., Ltd., which were released earlier, and are expected to continue to consolidate their competitive advantage. 2) Promote changes in revenue structure and strictly control accounts receivable risks: The company continues to adjust the revenue structure, and the share of collection has declined. Although accounts receivable have increased, the company attaches importance to risk and strictly controls bad debt accruals. Overall, individual accounts may be close to completion. It is expected that individual collective preparations will continue to decline in the future, and accounts receivable risks will be controlled.

Investment proposal: As the first company to lay out the field of polymer waterproofing, Karen Co., Ltd. has a good first-mover advantage. With the implementation of new waterproof regulations, the recovery in real estate infrastructure demand, the increase in demand for photovoltaic roofs, and the further improvement of its own channel layout, the company's subsequent growth is continuous. We expect the company's net profit to be 0.75, 1.33, and 220 million yuan respectively in 2024-2026, up 232.46%, 77.33%, and 65.20% year-on-year, with corresponding EPS of 0.20, 0.35, and 0.57 yuan, respectively. For the first time, coverage gave it an “increase in holdings” rating.

Risk warning: raw material prices have risen; new product development falls short of expectations; implementation of new waterproof regulations falls short of expectations; real estate market recovery falls short of expectations.