Incident: On August 27, 2024, the company released its 2024 semi-annual report. 24H1 achieved revenue of about 3.471 billion yuan, -19.96% year-on-year, realized net profit of about 0.094 billion yuan, +54.90% year-on-year, and realized net profit without deduction of about 0.042 billion yuan, or -21.90% year-on-year. Looking at a single quarter, 24Q2 achieved revenue of about 1.986 billion yuan, -19.61% year on year, realized net profit of about 0.041 billion yuan, +1527.20% year over year, and realized net profit after deduction of about 0.018 billion yuan, or +47.00% year over year. At the same time, the company's mid-term dividend plan is to pay a cash dividend of 0.80 yuan (tax included) for every 10 shares, with a total cash dividend of 0.09 billion yuan, accounting for 96.10% of the net profit attributable to mother for the period

Revenue declined due to the risk of active pressure drop, and gross margin increased. Due to multiple factors such as real estate policy adjustments, limited infrastructure driving effects, and high raw material prices, the waterproof industry's production and revenue have all declined under pressure. 24H1 achieved revenue of about 3.471 billion yuan, or -19.96% year-on-year, mainly due to cyclical factors in the industry, reduced downstream demand, and the company controlled deliveries to some medium- and high-risk customers based on sound management considerations.

24H1's gross margin was about 23.45%, +2.71 pct. Looking at a single quarter, 24Q2's gross margin was about 23.17%, up 2.42pct year on year. We believe that the improvement in gross margin performance was mainly due to the company putting forward the “high-quality development” business idea, actively exploring the market, continuously optimizing revenue and product structure, and achieving significant results in cost reduction and efficiency.

The fee rate has increased a lot, and the repayment situation has improved markedly. On the cost side, 24H1's expense ratio was about 17.32%, +2.31pct. Among them, the sales/management/ R&D/ finance ratio was 7.93%/4.37%/3.49%/1.52%, respectively, +1.44/+0.62/-0.24/+0.49pct, respectively. 24H1's sales expense ratio increased significantly year-on-year, mainly due to the company increasing its development of the civil construction market, developing new products and new businesses, and corresponding increases in advertising and marketing expenses; the financial expenses ratio increased significantly year-on-year, mainly due to the increase in interest accrued on convertible bonds. However, due to the increase in the company's gross sales margin, the compounded impairment losses were reduced. 24H1's net profit margin to mother was about 2.70%, still +1.31 pct compared to the previous year. In terms of cash flow, the net cash flow from 24H1's operating activities was -1.431 billion yuan. Although it decreased compared to 23H1, it was mainly due to the company increasing its cash payment ratio to suppliers based on capital conditions and comprehensive cost considerations, which led to a significant increase in cash paid for raw material purchases in the first half of the year. In terms of actual repayment, the company continues to strengthen its repayment efforts. As of 24H1, the payout ratio reached 92.50%, +9.99pct compared to the previous year. We believe that a significant increase in the company's revenue ratio can help achieve more stable monetization capacity and lay the foundation for improving medium- to long-term cash flow performance.

The waterproof industry continues to accelerate its clean-up, and new waterproof regulations ensure the healthy development of the industry. The new waterproof regulations require increasing the durability requirements of waterproof materials, increasing the number of waterproof channels and material thickness to meet higher working life requirements, etc. Since implementation, we believe that this policy has created more market space for leading manufacturers with better product quality and better performance. At the same time, as regulatory policies become stricter and compliance costs continue to rise, it is expected that the entry threshold and industry concentration of the waterproof industry will continue to rise in the future, and some small-scale enterprises will still face greater pressure to survive. According to the disclosure of the China Building Waterproofing Association, the failure rates for national supervision and spot checks on the quality of building materials products in 2020-2022 were 11.1%, 16.4%, and 18.8%, respectively. In recent years, the non-standard rate of waterproof products has been on the rise. After the implementation of the new waterproof regulations in 2023, the latest national failure rate dropped significantly to 15.9%, which may mean that the implementation of the new waterproof regulations can effectively curb the rise in non-standard rates, small factories may be cleared at an accelerated pace, and the competitiveness of leading manufacturers will increase.

Investment advice: We believe that considering the demand pressure brought about by the current decline in real estate, the company has made some progress in reducing costs, controlling fees, improving quality and efficiency, etc., which is reflected in improvements in profitability in the first half of the year. We forecast that the company's net profit for 24-26 will be $262, 4.31, and $623 million, respectively, maintaining a “buy” rating.

Risk warning: Real estate investment has declined sharply, the implementation of new industry regulations has fallen short of expectations, the sharp rise in raw material prices has exceeded expectations, and the withdrawal of backward production capacity has fallen short of expectations.