Impairment losses recouped profits, and performance continued to improve quarterly

The company 24Q1-3 achieved operating income of 5.136 billion yuan, -17.7% YoY, net profit of 0.126 billion yuan YoY, +53.94% YoY, net profit without return to mother 0.004 billion yuan, or -50.23% YoY, of which Q3 achieved revenue of 1.665 billion yuan in a single quarter, -12.56% YoY, and realized net profit attributable to mother 0.032 billion yuan, +51.22% YoY, net profit not attributable to mother -0.038 billion yuan, a year-on-year decrease of 0.008 billion yuan in losses. Revenue continued to be under pressure in the third quarter, while profit continued to grow well. We judge that on the one hand, due to a certain degree of improvement in the company's gross margin since '24, and the relatively low performance base for the same period in '23; on the other hand, due to an increase in impairment preparations for the company's individual accounts receivable, leading to an increase in non-recurring profit and loss, which significantly reduced credit impairment losses over the same period last year, rushing back some of the profits.

Raw material prices continue to decline, and profitability continues to increase

The company's 24Q1-3 gross margin was 23.0%, +1.85pct year on year, of which Q3 gross profit margin was 22.19% in a single quarter and +0.84pct year on year. Over the past 24 years, the company's gross margin has continued to improve over 23 years. We judge that this is mainly due to the year-on-year decline in raw material prices in the third quarter. Taking the asphalt prices we track in East China as an example, the prices of heavy focus asphalt and SBS modified asphalt in 24Q3 were -6.1% and -5.3% year-on-year respectively. Since entering the fourth quarter, the average price was -4.3% and -6.7% compared to 23Q4, respectively. If the subsequent asphalt price reduction trend continues, then we expect gross margin to still have a good basis for improvement.

Expense rates have increased slightly, and there is still room for improvement in cash flow

The 24Q1-3 company's cost rate for the period was 17.96%, +2.39pct year on year. Among them, sales, management, R&D, and finance expenses were +1.25, +0.85, -0.23, and +0.52 pct, respectively. Apart from R&D expenses, the absolute value of the remaining three expenses increased. 24Q1-3 recorded a total loss of 0.159 billion yuan in assets and credit impairment, a year-on-year decrease of 0.144 billion yuan. Under the combined influence, 24Q1-3 net margin was 2.33%, +1.05pct year over year. In terms of cash flow, the net CFO of 24Q1-3 was -1.504 billion yuan, with a year-on-year increase of 0.655 billion yuan. The revenue ratio was +8.37 pcts to 98.27% year over year, and the payout ratio was +33.09 pcts to 142.17% year over year.

Optimistic that the real estate market will stop falling and stabilize, and maintain a “buy” rating

On October 12, the Ministry of Finance mentioned that it will allow special bonds to be used for land reserves, support the acquisition of stock housing, and optimize the supply of affordable housing. Judging from the central bank's previous reduction in interest rates on stock mortgages, we are optimistic that the real estate market will stop falling and stabilize in the future, and the company is expected to continue to increase its market share in the waterproof industry with its channel advantages. Considering that the performance growth for the first three quarters fell short of our previous expectations, we lowered the company's 24-26 net profit forecast to 0.16, 0.23, and 0.3 billion yuan (previous values were 0.21, 0.3, and 0.39 billion yuan), corresponding to PE of 38, 27, and 21 times, respectively, maintaining the “buy” rating.

Risk warning: Prices of raw materials fluctuated greatly, the decline in real estate chain prosperity exceeded expectations, and the progress of business restructuring fell short of expectations.