Key points of investment

Event: The company released its 2024 semi-annual report. 2024H1 achieved operating income of 2.335 billion yuan, -19.78% YoY; net profit to mother 82.6 million yuan, or -49.77% YoY. Among them, Q2 achieved revenue of 1.516 billion yuan, or -16.16% year-on-year; net profit to mother of 72.97 million yuan, or -53.69% year-on-year.

The revenue from the engineering business has shrunk sharply, and the share of distribution has increased. By product, the revenue of 2024H1 porcelain glazed tiles/non-porcelain glazed tiles/ceramic plates & thin ceramic tiles was -16.17%/-54.81%/-18.05%, respectively. 2024H1 Overall consumer market demand in the pottery industry has shrunk, and the industry's kiln opening rate is low.

By channel, the company's 2024H1 distribution revenue was 1.766 billion yuan, -4.26% YoY; engineering strategy business revenue was 0.569 billion yuan, or -46.64% YoY. In accordance with changes in the market environment, the company adheres to the principle of steady management and voluntarily abandons some engineering orders with long account periods, high collection risks, and low gross profit levels.

The gross margin declined slightly year over year, and the expense ratio increased during the period. 2024H1's gross sales margin was 26.83%, a year-on-year change of -1.09pct; of these, 2024Q1-Q2 gross margin was 26.51%/27%, respectively, with a year-on-year change of +2/-3 pct. By product, the gross margins of 2024H1's porcelain glazed tiles/non-porcelain glazed tiles/ceramic plates & thin ceramic tiles were 26.88%/19.88%/34.60%, respectively, with year-on-year changes of -2.11/+0.49/+6.80pct. In terms of the cost ratio for the period, 2024H1 company's sales/management/R&D/finance expenses changed year-on-year by -0.39/+2.14/+0.33/+0.34pct, respectively. The decline in sales scale led to a reduction in cost dilution. Additionally, the company accrued credit impairment losses of 27.7 million yuan in 2024H1.

Operating cash flow increased significantly year-on-year, with an increase in the payout ratio and a decrease in the payout ratio. The net cash flow from 2024H1's operating activities was 0.376 billion yuan, an increase of 123.25% over the previous year. The main reason was that the company strengthened collaborative management of production and marketing, optimized the inventory structure; strengthened cost reduction management; strengthened receivables management; and introduced various sales policies to promote sales repayment. 1) Payout ratio: 2024H1 company's revenue ratio was 109.52%, year-on-year change +8.67pct; 2024H1 company's accounts receivable and notes receivable balance was 1.024 billion yuan, -11.55% year-on-year; 2) Payout ratio: 2024H1 company's payout ratio was 98.42%, year-on-year change of -5.11pct.

Profit prediction and investment rating: The company's distribution and strategic engineering channels are two-wheel drive. The company has reached strategic cooperation with many real estate companies in recent years, while expanding small B channels such as decoration and home improvement. The retail side continues to increase its channel decline and development efforts, the distribution share continues to increase, and the quality of operations is gradually improving.

Considering weak industry demand and increased industry competition, we lowered the company's 2024-2025 net profit forecast to 0.266/0.357 billion yuan (previous value was 0.612/0.713 billion yuan), and added the 2026 net profit forecast to be 0.423 billion yuan. The corresponding PE was 12X/9X/7X, respectively. The corresponding PE was 12X/9X/7X, respectively. Considering the company's active adjustment of channel structure and optimization of business quality, we maintained the “gain” rating.

Risk warning: risk of large fluctuations in raw material prices; risk of fluctuations in the real estate industry; risk of increased risk of market competition; risk of insufficient calculation of credit impairment losses.