CITIC SEC released a Research Report stating that the building materials Industry, being highly related to Real Estate, has faced downward pressure on revenue and profits since 2021, and the industry has also seen a clearing and optimization of the competitive landscape.
According to information from the Zhito Finance APP, CITIC SEC released a Research Report stating that the Building Materials Industry, being highly correlated with Real Estate, has faced revenue and profit downward pressure since 2021, and the industry is now experiencing a clearing out and optimization of its competitive landscape. Currently, CITIC SEC expects the decline in demand to narrow, with the second derivative turning positive, along with the policy direction of "anti-involution," leading some sub-industries to experience price increases and improvements in operating profit, exceeding market expectations. The industry's allocation value has already become apparent.
In terms of allocation rhythm, CITIC SEC believes that the sectors with smaller demand pressures and better existing competitive landscapes will be the first to welcome allocation opportunities. The recommended order is fiberglass, cement, and consumer building materials. Regarding Market Cap elasticity, CITIC SEC believes that the more capacity is cleared out, the higher the subsequent elasticity. Although the consumer building materials industry has not yet welcomed a profit turning point, a bottom has been established. Considering the long-term growth potential of leading enterprises and the industry clearing situation, CITIC SEC believes that in the second half of this year, there may be trend investment opportunities and comparatively better Market Cap elasticity than fiberglass and cement.
The main viewpoints of CITIC SEC are as follows:
Judgment on the demand for building materials in 2025: demand is declining, but the second derivative is turning positive.
On the Infrastructure side, with the deepening of debt disposal work, local government debt pressure has been effectively alleviated. On one hand, the growth rate of interest-bearing liabilities has significantly slowed down, with the nationwide urban investment interest-bearing liabilities reaching 4.12 billion yuan in 2024, with a year-on-year growth rate dropping sharply from double digits to 2.8%. On the other hand, financing costs for urban investment platforms have significantly decreased, with the average coupon rate of newly issued urban investment bonds in January-February 2025 at 2.5%, a decrease of 0.6 percentage points year-on-year. Once urban investment platforms repay their debts using the debt disposal funds, subsequent quality projects will regain borrowing capacity. According to the Century Building Network, as of March 25, the capital availability rate for sample construction sites was 57.9%, an increase of 1.4 percentage points year-on-year. In January-February, the national budget expenditure for government funds was 1,135.8 billion yuan, a year-on-year increase of 1.2%. In the 2025 government work report, it was proposed to implement a more proactive fiscal policy, raising the deficit scale by one percentage point. Therefore, it is believed that in terms of physical workload, Infrastructure investment in 2025 will outperform last year.
On the Real Estate side, according to the National Bureau of Statistics, the area of new housing starts/completions in 2024 is expected to decline by 23.0%/27.7% year-on-year, marking the second largest and largest decline in history respectively. If considering second-hand housing sales, the overall expected sales area of houses will turn positive year-on-year. It is believed that the bottom reversal of the industry cycle will undergo stages from capacity reduction to inventory reduction to the recovery of momentum. The 2021-2024 phase of the residential developers industry was the capacity reduction stage, which is likely to conclude. The years 2024-2025 will be the inventory reduction phase for the Real Estate industry, thus positive sales have not formed a pull on Real Estate Investment; as inventory is completed, it is expected that the negative impact on the building materials demand from the Real Estate sector will truly reverse. The land market shows significant warming; according to the Economic Daily, from January to February 2025, the cumulative transaction amount of residential land in 300 cities increased by 29.6% year-on-year due to multiple hot plot transactions in key cities nationwide, with an average premium rate of 10.9%. This indicates a marginal improvement in developers' investment willingness and the recovery of land sales revenues also helps alleviate local government funding pressure, beneficial for Infrastructure and municipal investment construction.
Considering the overall demand from Infrastructure and Real Estate, it is believed that the demand for building materials in 2025 will still face pressure, but the decline will narrow, with the second derivative turning positive. In January-February 2025, cement demand decreased by 5.7% year-on-year, a smaller decrease compared to the 9.5% decline for all of 2024; according to Komatsu's official website, excavators operated for 122.8 hours, a year-on-year increase of 13.4%, which also indirectly corroborates the judgment that the demand decline will narrow in 2025.
This round of "anti-involution" is timely, but the effectiveness of the policy depends on demand and the competitive landscape of the Industry.
At the Central Economic Work Conference and the 14th National Congress of the Communist Party of China, it was proposed to rectify "involutionary" competition.
Currently, profits in the Building Materials Industry have reached a historic low. In Q1-3 of 2024, the sales net margins for fiberglass (CITIC), cement (CITIC), and Other decorative materials (CITIC) dropped to 6%/1%/8%, a decline of 8/17/5 percentage points compared to 2020; Shandong Fiberglass Group and Xinjiang Tianshan Cement reported net losses of 0.11/3.75 billion yuan, respectively, marking the largest losses since their public listings; Guangdong KinLong Hardware Products excluding credit impairment provisions had a net profit of 0.15 billion yuan, the second-lowest in its history.
The Building Materials Industry is a market-oriented competitive sector where the role of policy in changing industry trends is supportive rather than disruptive. It is believed that industry profits have bottomed out, and whether there can be a rebound depends on the recovery of demand and the competitive landscape of the industry. The less pressure on demand and the better the competitive landscape (for China, the meaning of the competitive landscape includes industry concentration, foreign enterprise scale ratio, and state-owned enterprise scale ratio), the stronger the ability of large enterprises to dominate prices and the better the phased cooperation effect of small enterprises.
A typical example is Beijing New Building Materials Public, which holds a market share of over 60%. Against the backdrop of a significant decline in demand across the industry in 2022, the company's sales fell by 12% year-on-year, but our calculations show that the unit profit of its gypsum board business did not decline compared to 2021, demonstrating operational resilience amid decreased demand. In 2023, as the overall sales of gypsum board in the industry grew, Beijing New Building Materials Public achieved an increase in both volume and profit, with net profit attributable to shareholders (excluding non-recurring gains and losses) rising 32% year-on-year, exceeding market expectations.
Why is the time dimension such that fiberglass leads cement, which leads consumer building materials, while in terms of elasticity, consumer building materials are higher? Low profitability triggers industry collaboration for self-rescue, with the price recovery path shifting from "no room to fall" to "elasticity release."
1) Fiberglass prices will gradually be increased across all product categories starting from the end of March 2024, with further price increases expected after the Spring Festival in 2025. 2) Cement prices will be raised by 100 yuan/ton in October 2024, and although there will be some subsequent adjustments, price increases will resume in many places in March 2025. 3) Consumer building materials such as coatings and waterproofing have been experiencing price increases since March 2025. We believe the leading price increase of the fiberglass industry is due to better demand and a favorable competitive landscape. On the demand side, the applications of fiberglass downstream are broader, with the wind power and auto sectors contributing incrementally, while from the competitive landscape perspective, the global CR6 of the fiberglass industry and the domestic CR6 both exceed 75%, with leading company China Jushi Co., Ltd holding nearly 30% of the global market share. Therefore, in March 2024, when the industry's supply-demand structure had not significantly improved, price increases were initiated, leading to quarterly profit increases in the industry.
Although demand in the cement industry is weaker than in fiberglass, the competitive landscape is relatively good. Cement is a regional product, with the main regions showing CR3 ratios of 52%/45%/48%/42%/49% in East China/Central China/South China/Southwest/North China. In October 2024, the industry's peak season price elasticity will reach a historical high, with industry profits turning from negative to positive. Since March 2025, multiple price increases have also exceeded market expectations, and major enterprises are expected to see significant year-on-year growth in net profits for Q1 and H1 this year, reversing their losses.
The demand in the Consumer Building Materials Industry is better than that of Cement and weaker than that of Fiberglass. Except for the gypsum board industry, the competitive landscape in other sub-sectors is worse than that of Fiberglass and Cement. The industry downturn since 2021 has led to a rapid clearing in many Consumer Building Materials sectors (while very few companies have exited the Fiberglass and Cement industries). Therefore, if demand can stabilize or even become positive, the market cap elasticity of leading Consumer Building Materials companies is expected to be higher.
Risk factors:
Downstream demand from Real Estate and Infrastructure is below expectations; excessive new production capacity in the industry has further worsened the competitive landscape; raw material costs are fluctuating significantly; leading companies' diversification has not met expectations; and environmental policies are becoming stricter.
Investment Strategy.
Looking from the current perspective, the Building Materials Industry still has structural opportunities under the policy direction of "anti-involution". The profit bottom has already appeared, and the industry is collectively raising prices, leading to significant elasticity in company performance.
