Key points of investment

National leader in architectural ceramics, sales target the middle and high-end markets. Mona Lisa was founded in 1992 and is dedicated to the R&D, production and sales of high-quality building ceramics products, and ranks second in the industry in terms of market share in terms of output.

Focusing on the strategy of large tiles, large building materials, and large homes, the company has created an overall solution focusing on innovative applications such as rock slab furniture, integrated wall panels, kitchen panels, etc., and is also working in the field of high-end rock plate customization. The middle and high-end image is deeply rooted in the hearts of the people. Since 2023, along with the weakening impact of large-scale depreciation measures, the company has gradually broken out of the performance slump caused by the downturn in real estate. The decline in operating income narrowed to -4.94% year on year, achieving net profit to mother of 0.266 billion yuan, +169.93% over the same period last year.

Stricter environmental regulations are compounded by changes in product structure, and industry concentration is expected to increase. As an important part of the clean transformation of industrial energy, coal-to-gas is accelerating the transformation and upgrading of production capacity in the building ceramics industry. Since the conversion of coal to gas will directly drive up the production costs of pottery companies, the current transformation progress of various production areas is highly differentiated, and cost pressure may force small pottery companies in production areas where the transformation progress is lagging to stop production and exit. At the same time, the product structure of the pottery industry is leaning towards new categories, and the characteristics of individualization, functionality, and art are becoming more and more obvious. Overall, the pottery industry is expected to continue to clear out small pottery companies with poor production capacity, serious product homogenization, and limited channels, and the leaders are expected to achieve a steady increase in concentration.

Sales structure optimization+promotion of rock slab products to reshape the company's competitiveness. 1) Shrink the strategic engineering business and reduce repayment risks related to real estate. Affected by the downturn in real estate, the repayment risk of the B-side strategic engineering business has increased significantly. The company has firmly implemented the omnichannel strategy through measures such as sinking traditional channels, developing diversified emerging channels, and strengthening the retail experience. As of 2024Q1, the company's engineering business revenue share has been reduced to 28.83%, and related repayment risks may be accelerated. 2) Increased investment in the rock slab sector is expected to open up new growth points. Rock slab is an advantageous category that Mona Lisa has been deeply involved in for more than ten years. It has competitive advantages such as wide application, excellent brand, and leading technology. The company continues to invest in the development and promotion of rock plate products, and is expected to fulfill its first-mover advantage along with changes in the overall product structure of the industry in the future.

Investment advice: The construction ceramics industry is being cleared at an accelerated pace. As an industry leader, the company has leading scale, channel and brand advantages. Rock board products have unique competitiveness, are expected to further seize market share, and overall performance is upward elastic after a painful period of channel transformation. We expect the company's 2024-2026 net profit to be 0.284, 0.357, and 0.45 billion yuan, respectively, and the corresponding EPS is 0.68, 0.86, and 1.08 yuan, respectively. The first coverage gives an “gain” rating.

Risk warning: Real estate completion repair falls short of expectations, industry competition intensifies, new production capacity is difficult to digest, and prices of raw materials and fuel fluctuate greatly.