Investment summary

Valuation and investment advice

It is estimated that the company's EPS in 2014 and 2015 was 0.07 yuan and 0.10 yuan. Based on the stock price of 6.65 yuan on March 19, PE was 100.59 times and 66.61 times respectively. Compared with the current dynamic price-earnings ratio of Shenwan's building materials industry, which is only 9.97 times calculated using the overall method, it is clearly high, but considering that the company has just taken off its stars and that the new business involves the field of atmospheric control where market attention is high, its valuation is still within an acceptable range.

We believe that although the company was able to successfully get out of the stars, it is also due to the narrowing of losses in its main business, but it is also inseparable from the income from changes in fair value brought about by changes in accounting policies and the investment income from the transfer of subsidiaries. However, the latter two types of revenue mentioned above have obvious one-off characteristics and are difficult to sustain. The main goal of the company in 2014 is to turn a loss into a profit in its main ceramic tile business. Judging from the current situation, the company is actively developing new products, improving the existing dealer network, and continuously increasing the sales volume and profit margins of its products by continuously increasing product sales and profit margins throughout the year. There is great hope that the company will actively develop new products, improve the sales volume and profit margin of its main business throughout the year. However, since the company's main revenue in 2014 came from its main ceramic tile business, its performance flexibility may be limited; at the same time, Smick Health Board is involved in the field of environmentally friendly air treatment, and potential market space is large, but it is still difficult to contribute to performance in the short term; however, pension real estate is still in the planning and inspection stage, so it is not appropriate to overinterpret it.

Based on comprehensive considerations, we believe that the company's main business is expected to reverse losses in 2014, and getting involved in the air treatment and pension industry may also become a catalyst for the company's valuation. We are optimistic about the company's future market potential for green building materials and give it a “careful increase in holdings” rating.

Core Assumptions

(1) We believe that with the gradual advancement of urbanization and the increase in consumption levels, the overall scale of the ceramic tile market is expected to continue to expand. The company will gain greater market share with its technical advantages and the improvement of the marketing network and the conclusion of the relocation work. It is expected that in 2014-2015, vitrified brick revenue will increase by 8% and 11%, and glazed tile revenue will increase by -3% and 5%;

(2) In terms of Smick's health board, it is expected that trial production on its own production line will be achieved in the fourth quarter of 2014, and production will gradually expand in 2015. Due to prudent considerations, 2014-2015 will increase tenfold and fivefold respectively;

(3) Considering the uncertainty of the pension industry, we do not estimate its future revenue. The Shanghai plant is still used for rent, contributing 43 million yuan of non-operating income per year; (4) Since the company's marketing network is still being improved, we determine that its share of sales expenses still has room to decline. Referring to the level of Dongpeng ceramic tiles, we gave it sales costs/operating income of around 16% in 2014-2015.

Differences with market expectations

(1) The market believes that after taking off its stars, its main business in 2014 still faced great difficulties, and that it may return to the list of loss-making enterprises after lacking support from fair value fluctuation income and investment income. We believe that while continuously improving the existing sales network, the company is also actively developing new products to meet the individual needs of different customers. The revenue and profit margin of the ceramic tile business are expected to increase to a certain extent throughout the year, and there is a high possibility that the main business will turn a loss into a profit.

(2) The market has extreme views of positive and negative effects on its health board. We have a relatively neutral and optimistic attitude: Judging from the available data, the Smick Health Board has great market potential, but its subsequent testing data and actual demand still require further laboratory testing and marketing before it can be obtained.

(3) The market is very optimistic about the development of its pension real estate. We believe that with the advent of an aging society, the market space for the pension industry is extremely large, but whether viewed from a national perspective or the company itself, the development of the entire pension industry is still in a period of exploration. Coupled with the government's key role in it, the development of the industry is extremely uncertain, so it is not appropriate to be overly optimistic.

Key Risks

(1) the risk of real estate regulation being tightened;

(2) the risk of increased environmental policies;

(3) Risk of failure in new product development