3Q24 results fell short of our expectations

The company announced 1-3Q24 results: revenue +19% YoY to 20.4 billion yuan, net profit to mother +14% YoY to 3.1 billion yuan; of these, single 3Q revenue +20% YoY to 6.8 billion yuan, and net profit +8% YoY to 0.931 billion yuan, lower than our and market expectations, mainly due to gypsum board gross margin lower than expected.

Revenue grew rapidly, gross margin declined sequentially, and profit margins were lowered. 1) Gypsum board sales remained steady, but price pressure: We estimate that 3Q23 gypsum board sales were basically flat, but due to market demand pressure and the increase in the middle and low end product structure, the average product price dropped significantly (we estimate the average price of gypsum board -8%; -11% month-on-month), but the gross margin remained high at 38% (-4ppt; -2ppt); 2) Emerging businesses continued to grow: 3Q revenue in the waterproof sector reached +17% to 1.2 billion yuan, and paint revenue reached 17 billion yuan, respectively; %/ 31%; 3) 3Q24's comprehensive gross margin was 30% (-2.7ppt month-on-month, -1.9ppt), mainly driven by a decrease in gypsum board gross margin; 4) The increase in expenses during the period: 3Q24 sales/management/finance/R&D expenses were +31%/+3%/+12%, respectively, making the period cost ratio +0.6ppt to 14.7% year over year (+2.4ppt compared to month). 5) 3Q24 net margin -1.5ppt to 13.8% yoy (-4.4ppt).

The quality of operations remains excellent, and the debt ratio is stable. 1) Cash flow remained steady: 1-3Q24's revenue ratio was -2.6ppt to 86% year over year (with single 3Q revenue ratio -4.5ppt to 89% year over year), net operating cash flow in the first three quarters +38% to +2.71 billion yuan (mainly due to mergers and acquisitions, and Gabrielle increased cash flow). Among them, 3Q24 accounts receivable turnover days were +2.6 days to 55 days year over year, and accounts payable turnover days remained basically flat at 45 days year over year, inventory turnover days -13 to 52 days; 2) Excellent balance sheet liabilities:

The 3Q24 balance ratio was -1ppt to 28% month-on-month, and it was in a net cash position.

Development trends

The share of gypsum board continues to rise, and cash flow supports the acceleration of the “two wings”. We believe that due to sluggish market demand and owners' renovation budget control, the overall price of the industry is under pressure, but the company continues to optimize marketing strategies, dig deeper into inventory, and product combinations to maintain stable gypsum board sales, and its market share continues to increase, while providing the company with abundant cash flow. Supported by high-quality cash flow, the company's waterproofing and coating business segment will continue to strengthen its competitiveness due to financial support, central enterprise background empowerment, and “Three Precision Management”, etc., and bucked the trend to gain share at an accelerated pace, contributing to the company's second growth curve.

Profit forecasting and valuation

We keep our 2024/25 earnings forecast unchanged, and the current stock price corresponds to 24/25 12x/10x P/E.

We keep our outperforming industry rating and target price of 36 yuan unchanged, corresponding to 14x/12x P/E in 24/25, implying 16% room for growth.

risks

The decline in demand for gypsum board exceeded expectations, the integration of the paint business fell short of expectations, and the growth of waterproofing fell short of expectations.