1H24 results fall short of our expectations

The company announced 1H24 results: revenue -30% YoY to 1.04 billion yuan, net profit to mother changed from profit to loss to -19.13 million yuan; of these, 2Q24 revenue was -25% to 0.75 billion yuan, and net profit was +14% YoY to 62.6 million yuan. The performance was lower than our expectations, mainly due to the decline in revenue and gross margin.

1) Demand was under pressure, and the company actively adjusted its customer base, and revenue declined significantly: 1H24 paint sector revenue was -41% to 0.61 billion yuan (1Q/2Q revenue was -52%/-36% year over year), of which total 1H24 paint sales volume was -35% to 0.21 million tons (1Q/2Q sales volume was -39%/-33% year-on-year, respectively); revenue from building energy-saving materials in other sectors was -14% to 0.253 billion yuan (1Q/2Q, respectively -26%/-26%/) The waterproof sector's revenue was +21% to 0.135 billion yuan (1Q/2Q +11%/+25%, respectively); in addition, the company's 1H24 direct sales revenue accounted for -6ppt to 14.6% year over year. 2) Product price pressure, gross margin decline: due to the decline in the company's engineering paint price (1H24 average price -10%), the gross margin of the 1H24 coating sector was -9.7ppt to 31% year on year, while the gross margin of the insulation sector was -5.2ppt to 12.4% year on year, and the waterproof gross margin was -10.1ppt to -10% year on year (mainly due to the successive transformation of waterproof factories, low capacity utilization, and high fixed depreciation costs). The company's consolidated 1H24 gross margin -10.8ppt to 23% yoy (2Q gross margin -9ppt to 24.4% yoy). 3) Rapid reduction on the cost side: 1H24 company expenses were rapidly reduced (1H sales/management/R&D expenses -26%/-9%/-15%), but due to the decline in revenue, the cost rate also increased to a certain extent (cost rate +5.1ppt to 29.7% year-on-year during the 1H24 period, +1.4ppt compared to the 2Q period). 4) Credit impairment rushed back, boosting profit margins: The company's 2Q24 credit impairment rushed back 30.63 million yuan (74.92 million yuan was calculated in the same period last year), bringing the 2Q net interest rate +2.8ppt to 8.4% year-on-year.

Excluding the impact of credit impairment, the company's 2Q24 operating margin was 3.8% (YoY -10.7ppt). 5) Weak cash flow: 1H24's operating cash flow changed from positive to negative to an outflow of 0.217 billion yuan (inflow of 68.59 million yuan in the same period last year), with a revenue ratio of -12ppt to 87% year-on-year. 6) High debt ratio: 1H24 balance ratio remains stable at 75%, net debt ratio is 106%.

Development trends

Industry demand is under pressure, and operating pressure is increasing. Looking forward to the future, we believe that completion pressure may still be high, and demand for the paint and insulation sector is still being suppressed. Subsequent companies are expected to actively adjust product structures and restore profitability through channel adjustments and abandoning low-margin products.

Profit forecasting and valuation

Considering the decline in revenue, we cut net profit for 24 by 72% to 62.51 million yuan, and introduced net profit for '25 of 64.76 million yuan. The current stock price corresponding to 2024/25e P/E is 45x/44x. Considering the company as an industry leader, we maintained an outperforming industry rating and lowered the target price by 31% to 7.2 yuan, corresponding to the 2024/25 P/E of 49x/48x, implying an upward margin of 9%.

risks

Demand recovery fell short of expectations, and industry competition intensified.