Introduction to this report:
The company's retail coatings continue to sink into community and township markets, and the market share of engineering coatings maintains a competitive advantage against the trend in the context of industry clean-up.
Key points of investment:
Maintain an “Overweight” rating. The company's retail coatings continue to sink into community and township markets, and the market share of engineering coatings maintains a competitive advantage against the trend in the context of industry clean-up. Considering cost dilution, it will take more time to implement the gradual progress. The 2024-2026 EPS will be adjusted to 1.50 (-0.55), 1.88 (-0.58), and 2.30 (initial) yuan. Based on comparable company valuations, the 2024 PE will be given 37.7x, and the target price will be lowered to 56.50 yuan (-37.80) to maintain the “gain” rating.
Retail coatings continue to effectively sink, and engineering coatings bucked the trend and increased their market share. 2024Q1's home decoration paint revenue was 600 million yuan, up 13% (volume +14.84%, price -1.66%), while engineering paint revenue of 542 million yuan decreased by 15.52% (volume -8.7%, price -7.56%). We judge that the company's retail paint strategy may mainly be skewed towards community stores and the two effective markets of “beautiful villages”, while efforts on the product side push art paint to become the consensus of leaders in various industries to increase customer unit prices and profitability. From the perspective of engineering coatings, real estate credit risk has prompted paint material companies and engineering subcontractors to usher in a round of clearance. The company's engineering architectural coatings may have become the number one on a domestic scale. In the future, the company will strive to increase new customer demand scenarios in the background where the pressure on engineering demand has not been completely lifted, and maintain a considerable revenue volume to achieve an effective increase in market share. The 23-year growth rate of adhesives and base materials is ahead of the increase in coating support rates, and the high growth trend is expected to continue. New growth points such as automotive coatings and automotive materials are also gradually being laid out.
Performance flexibility depends on strategic trade-offs in cost control. The gross margin is projected for 2024, and the price and cost side trends may be relatively stable. Quarterly fluctuations are mainly influenced by revenue structure factors.
The 2023Q4 company's sales+management+R&D+finance ratio was 36.7%, up 12.34pcts. The main increase was on the sales expenses side, or involving centralized settlement of bonuses, etc. The 24Q1 company's comprehensive expense ratio was 33.86%, an increase of 3.66 pcts. The flexibility of a company's performance depends on the strategic trade-off between investment and cost control, which may increase as the pattern of competition in the industry slows down and the expected revenue growth requirements decrease.
The impact of impairment on performance is subsequent or reduced. The 23Q4 company's accrual of $330 million affected the company's performance. In 2023, the total amount of $510 million was accrued, of which receivables accrued credit impairment of $355 million, and asset impairment of other non-current assets and contract assets each accrued 70 million. Along with the increase in real estate stock accounts receivable ratio, subsequent impairment effects or decreased significantly. The 23Q4-24Q1 company's balance ratio has stabilized at around 80%. Subsequent capital expenditure investment may be relatively stable, such as the share of retail business continuing to increase in debt ratios or showing gradual restoration.
Risk warning: Real estate sales and investment fell short of expectations; raw materials rose sharply.