The company achieved total operating income of 1.043 billion yuan in the first half of 2024, down 29.86% year on year; net profit to mother was -19.1344 million yuan, profit for the same period last year was 39.2084 million yuan, down 148.80% year on year; net profit not after deducting from mother was 34.0559 million yuan, profit for the same period last year was 31.941 million yuan, down 206.62% year on year; basic EPS was -0.04 yuan/share, weighted average ROE -0.08%

24Q2's net profit turned loss into profit, the share of distribution was further increased, and the waterproof business gradually expanded. The company achieved total operating income of 1.043 billion yuan in the first half of 2024, -29.86% year-on-year; net profit before and after deducting pre- and backward net profit was -19.1344 million/ -34.0559 million yuan, -148.80%/-206.62% year-on-year. On a quarterly basis, 24Q1/Q2 revenue was 0.295 billion yuan/0.748 billion yuan, respectively; net profit to mother was loss of 81.7346 million/profit of 62.6003 million yuan, respectively. Q1 loss increased 412.09% year over year, and Q2 net profit turned into profit month-on-month, +13.47% year-on-year. By product, the revenue of architectural coatings, building energy-saving materials, and waterproof materials in the first half of the year was 0.61 billion yuan/0.253 billion/ 0.135 billion yuan, respectively, or -41.37%/-13.68%/+20.95%. The architectural coatings business declined significantly, but the waterproof materials business showed relatively rapid growth. By channel, 24H1's distribution model business accounted for 85.43% of the main revenue, and the direct sales model business accounted for 14.57% of the main revenue. The company's share of distribution revenue increased by 5.89pct over the same period last year. The distribution/direct sales business revenue was estimated at -24.67%/-50.05%, respectively.

Higher costs, lower selling prices, and higher rates put pressure on profit margins. 24H1's gross sales margin was 23.12%, -10.83pct year on year; net sales margin fell to -1.84%, -4.47pct year on year. The gross sales margin for the 24Q2 quarter was -9.00pct yoy to 24.43%, and the net sales margin was +2.83pct yoy to 8.37%. Profitability improved in Q2. By product, in 24H1, the gross margins of architectural coatings/building energy-saving materials/waterproof materials were -9.73pct/-5.19pct/-14.86pct to 31.02%/12.39%/-10.08%, respectively. The gross margin of the waterproofing business declined markedly, mainly due to the successive transformation of the company's waterproofing plants, an increase in fixed costs, and a decline in market prices for superimposed products. In terms of price, the prices of 24H1's architectural coatings and energy-saving building materials have all declined. Among architectural coatings, the average price of engineering coatings/home decoration coatings was -10.22%/-8.10%; among building energy-saving materials, the average price of insulation decorative panels/insulation materials was -11.23%/-9.79% year-on-year. On the cost side, the average unit price of 24H1 emulsion/titanium dioxide/ polystyrene particles/ resin/ additives/ calcium silicate board/ pigment filler was +1.52%/+5.33%/+25.08%/-1.28%/-4.67%/+12.24%, respectively; prices of major raw materials generally increased. On the cost side, the cost rate during the 24H1 period was +5.14pct to 29.68%, with sales/management/R&D/finance expenses ratios +0.74pct/+1.70pct/+0.55pct/+2.14pct, respectively. At 24H1, the company's net operating cash flow was -0.217 billion yuan, with a net inflow of 68.5897 million yuan in the same period last year, mainly due to a decrease in payment received; at the end of 24H1, the total balance of the company's accounts receivable and notes was 1.726 billion yuan, or -23.25% over the same period last year.

Lay out a wide range of channels and production capacity to help market penetration. In terms of channels, as of 24H1, the company has built a comprehensive marketing network, with 44 provincial marketing agencies, 144 marketing offices, covering the whole country, and cooperating with 0.0256 million registered dealers to ensure deep penetration of urban and rural markets and promote integration and synergy between various business segments. In terms of production capacity, the company has formed a “1+5+20” national advanced production capacity layout based on the “1+6+N” and “1+8+N” production capacity layout plans, and has achieved 150-300 kilometers of localized nearby supply capacity for paint, finished board, insulation, waterproofing, mortar, and new household materials.

It has “integrated coating and protection” service capabilities, and actively creates “big retail”. Relying on 20 years of experience in architectural coatings and insulation materials, the company has created comprehensive solutions covering coating, insulation and waterproofing, diversified the product portfolio, adapted to the “integrated coating, protection and protection” bidding requirements, and helped increase market share and brand influence.

Furthermore, the company first proposed “big retail” in the industry (that is, all-product, omni-channel, full-level integrated retail), which is expected to enhance in-depth coverage at all levels of the market. Considering the intense price competition in the industry in the first half of the year, we lowered our profit forecast. We expect the company's EPS for 2024-2025 to be 0.28 yuan and 0.36 yuan respectively, and the corresponding PE will be 23.4x and 18.1x, respectively, maintaining the “Highly Recommended” rating.

Risk warning: sharp decline in real estate and infrastructure investment growth rate, risk of fluctuations in raw material prices, failure to develop waterproof business as expected, risk of impairment of accounts receivable