What happened

Beijing New Building Materials (BNBM) announced the launch of an equity incentive plan, targeting recurring net profits of Rmb4.56bn, Rmb5.47bn, and Rmb6.57bn for 2025, 2026, and 2027, largely in line with market expectations.

Comments

Equity incentive target largely aligns with expectations, reflecting management's confidence in strong growth. On January 1, the firm announced the launch of an equity incentive plan to grant 12.9mn shares (equivalent to 0.76% of the current share capital) to core employees at Rmb18.2/share, covering a total of 347 employees. The equity incentive plan requires the company's recurring net profit for 2025-2027 to achieve CAGRs of no less than 14.22%, 16.12%, and 17.08% compared to 2023. Additionally, the profit CAGR must exceed either the 75th percentile of benchmark companies or the industry average. The recurring return on equity (ROE) must also surpass 16.5%, 17.5%, and 18.5% for 2025, 2026, and 2027. This translates to recurring net profits of no less than Rm4.56bn, Rmb5.47bn, and Rmb6.57bn for 2025-2027.

For the firm's previous' equity incentive plan set at the end of 2023, the targets for recurring net profit were Rmb4.26bn, Rmb6.16b, and Rmb6.47bn for 2024-2026. We believe the current incentive plan focuses on a stable and upward profit trajectory, offering greater stability compared to the previous plan. We expect the firm to gradually meet its profit targets by focusing on gypsum board while also expanding its efforts in waterproofing, coating materials, and M&A.

External expansion accelerating; M&A to provide notable boost. Since 2019, the company has acquired several waterproof material firms to strengthen its waterproof materials business. In 2024, it began M&A transactions in the coatings sector, acquiring Carpoly Coatings in early 2024 (with a promised net profit of approximately Rmb410mn, Rmb460mn, and Rmb520mn for 2024-2026) and Shandong Bridge Paint in late 2024 (which reported a net profit of around Rmb30mn in 2023).

Looking ahead, we anticipate that the company may increase its cash acquisitions. According to its announcements, assets acquired through share increases and convertible bonds, as well as the resulting net assets and net profits, are excluded from assessment calculations. As of 3Q24, the firm's liability-to-asset ratio stood at only 28%, and it maintained a net cash position, suggesting significant room for leveraging. Additionally, the company's financing costs are notably low, largely remaining below 3%.

The firm has a solid foundation in the gypsum board business, contributing stable profit and cash flow. Gypsum boards account for the majority of the firm's earnings and cash flow. While the market is concerned about a potential decline in completed gross floor area (GFA), we believe the firm possesses strong competitive advantages in the gypsum board market, including cost efficiency, extensive regional coverage, effective channel marketing, and strong brand power. We think that even under industry pressure, the firm is well-positioned to gain market share and sustain stable profits, with annual profit and cash flow contributions exceeding Rmb3bn. This is achieved through penetration into lower-tier markets, exploration of new regions, and diversification of product categories, providing robust support for M&A.

Risks

Worse-than-expected competition in the gypsum board market; slower- than- expected M&A progress.