Core views

The company achieved revenue of 5.76 billion yuan in the first half of 2024, an increase of 0.4% year on year; realized net profit of 0.21 billion yuan, a year-on-year decrease of 32.4%; achieved revenue of 3.69 billion yuan corresponding to the second quarter, an increase of 0.3% year on year; realized net profit of 0.16 billion yuan, a year-on-year decrease of 42.7%.

The sharp decline in the company's net profit due to the company's accrued credit impairment losses of 0.157 billion yuan in the first half of the year. Although current impairment losses had a major impact on the company's profits, the company achieved double-digit growth on the revenue side, paint retail channels and non-paint business (waterproofing, adhesives). We believe that after getting rid of the burden of depreciation, the company will go to battle lightly and return to a growth path.

occurrences

The company released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 5.76 billion yuan, an increase of 0.4% year on year; net profit to mother was 0.21 billion yuan, a decrease of 32.4% year on year.

Brief review

Impairment significantly dragged down performance. In the first half of 2024, the company achieved revenue of 5.76 billion yuan, a year-on-year increase of 0.4%; achieved net profit of 0.21 billion yuan, a year-on-year decrease of 32.4%; achieved revenue of 3.69 billion yuan corresponding to the second quarter, an increase of 0.3% year on year; realized net profit of 0.16 billion yuan, a year-on-year decrease of 42.7%. The sharp decline in the company's net profit to mother is mainly due to:

1. The company's gross margin fell 2.4 percentage points to 28.6% in the first half of the year; 2. In the first half of 2024, the company accrued credit impairment losses of 0.157 billion yuan, an increase of 84.14 million yuan over the same period last year.

Retail channels have grown significantly, and the effects of category expansion have been prominent. In the first half of 2024, the company achieved wall paint sales revenue of 3.29 billion yuan, up 0.7% year on year, of which engineering wall paint revenue reached 1.84 billion yuan, down 10.7% year on year; home decoration wall paint revenue reached 1.45 billion yuan, up 20.1% year on year. The company achieved rapid growth in wall paint products by speeding up retail channel expansion. In the first half of 2024, the company sold 0.252 million tons of home decoration wall paint, up 24.0% year on year; the unit price of home decoration wall paint reached 5.8 yuan/kg in the first half of the year, a slight decrease of 3.1% year on year. In addition, the company's waterproof membranes, adhesives, and base materials increased by 16.4%, 29.3%, and 6.7% respectively in the first half of the year.

Significant credit impairment was calculated to help the company go to battle lightly. In the first half of 2024, the company accrued impairment losses of 0.159 billion yuan, including asset impairment losses of 2.087 million yuan and credit impairment losses of 0.156 billion yuan, mainly accounts receivable impairment losses of 0.151 billion yuan. Affected by this, the company's net interest rate to mother in the first half of the year was only 3.6%, down 1.8 percentage points from the same period last year. Although the sharp calculation of impairment losses had a major impact on the company's current profit, we believe this move will also help the company get rid of the impact of past real estate arrears as soon as possible and go to battle lightly.

Maintain a buy rating. We forecast that the company's revenue for 2024-2026 will be 12.77/14.03/15.54 billion yuan, up 2.4%/9.9%/10.7% year on year; net profit to mother will reach 0.45/0.65/0.81 billion yuan, up 160.9%/42.6%/24.8% year on year, corresponding EPS will be 0.86/1.23/1.53 yuan/share respectively, corresponding to current PE of 34/24/19, maintaining the purchase rating.

Risk analysis

1) Real estate regulation risk

The company's main customers are real estate agents, construction engineering companies and home improvement customers. Based on the development of the real estate industry, the development of the real estate industry is greatly affected by the country's macroeconomic, monetary policy, fiscal policy, and national regulatory policies. If the growth rate of demand and investment in the Chinese real estate market slows down or even declines in the future, and is transmitted to upstream paint companies, it may cause the company's product demand to decline accordingly.

2) Risk of fluctuations in raw material prices

The main raw and auxiliary materials of the product include emulsion, resin, titanium dioxide, various organic solvents, packaging, etc. The cost of various chemical raw materials and packaging accounts for a high proportion of the company's main business costs. If the market price of raw materials rises sharply, there is a risk that main business costs will increase and performance will decline due to rising material prices.

3) Accounts receivable recovery risk

Customers of engineering wall coating products include large real estate developers, and single customers purchase on a large scale. The credit policy for engineering wall paint customers gives this type of customer a higher credit limit and a longer credit period. If such customers experience operational difficulties due to fluctuations in the real estate industry, the company will face the risk that accounts receivable cannot be recovered in a timely manner.