Incident: 2024Q1-3 revenue of 3.773 billion yuan increased by 0.71%; net profit to mother of 0.624 billion yuan decreased by 28.64%; after deducting non-net profit of 0.612 billion yuan, a decrease of 13.80%. Q3 revenue of 1.43 billion yuan decreased by 5.24%; net profit to mother of 0.284 billion yuan decreased by 25.27%; after deducting non-net profit of 0.272 billion yuan, the same decrease was 26.23%.

Weak demand+increased expenses, and Q3 revenue and profit both fell: on the revenue side, the revenue growth rate of 2024Q1-Q3 in a single quarter was 11.19%/0.41%/-5.24%, respectively. The decline in the growth rate compared to the previous quarter was due to real estate fluctuations affecting downstream demand.

On the profit side, the gross margin of 2024Q1-Q3 in a single quarter was 41.48%/42.58%/43.11%, respectively, +4.30/ -1.25/ -4.89pct year over year, respectively. The year-on-year decline in Q3 gross margin was mainly due to lower raw material prices 2) The sharp drop in the price of PVC raw materials in Q3 by 9.57% stimulated competition. On the cost side, the cost ratio increased by 22.50% to 2.67 pct during the Q1-3 period, and the sales/management/R&D expense ratios were 14.70%/5.71%/3.20%, respectively, +2.51/+0.01/-0.13 pct, respectively. The company's contrarian expansion led to an increase in sales expenses. Asset and credit impairment losses were 0.012 billion yuan, and the asset and credit impairment loss rate was 0.33%, up 0.18 pct. Gross profit declined and sales expenses increased. Q1-3 net profit to mother fell by 28.64%, while investment income mainly generated by Dongpeng Heli fell by 101.54%, which led to a 13.80% drop in non-performance. Q1-3 Net cash flow from operating activities of 0.812 billion yuan increased by 1.12%; revenue ratio decreased by 1.4 pct from 110.7%; payout ratio decreased by 8.9 pcts from cash on payment ratio of 95.2%.

Expanding channels and categories continues to advance, waiting for downstream demand to recover: the company will strengthen retail business in the following areas: 1) Further improve channel construction: as of H1, the company has more than 0.031 million marketing outlets, and continuing to broaden the declining channels is expected to increase the company's market share; 2) increase concentric circle business development efforts and increase the average household balance. In the context of continued relaxation of demand-side policies, downstream demand is expected to gradually pick up. Since October, the number of real estate project visits and subscriptions has increased steadily. Competition in the supply-side plastic pipeline industry is heating up, industry reshuffle is accelerating, and the company is expected to continue to increase its market share by focusing on retail and expanding categories and channels.

Investment advice: We predict that the company's net profit for 2024-2026 will be 1.112/1.313/1.491 billion yuan, a year-on-year growth rate of -22.34%/+18.03%/+13.58%, corresponding EPS of 0.70/0.82/0.94 yuan, respectively. The latest closing price corresponds to 2024-2026 PE 21.84x/18.51x/16.29x, respectively. Maintain an “Overweight” rating.

Risk warning: the expansion of new categories falls short of expectations; industry competition intensifies; channel broadening falls short of expectations, etc.