2024 and 1Q25 results in line with market expectations

The firm announced its 2024 and 1Q25 results: In 2024, revenue fell 3% YoY to Rmb12.1bn, and net profit attributable to shareholders grew 91% YoY to Rmb332mn, in line with market expectations. In 1Q25, revenue rose 3% YoY to Rmb2.13bn and attributable net profit was Rmb105mn, in line with market expectations.

2024 results. 1) Revenue remained solid; retail sales grew despite headwinds: In 2024, the firm's sales volume of coatings for home decoration and engineering projects rose 13% and fell 2% YoY to 0.49mnt and 1.16mnt. Revenue from coatings for home decoration and engineering projects rose 13% and fell 13% YoY to Rmb3.0bn and Rmb4.1bn (vs. +9% and -13% YoY in 4Q24). Revenue from coating materials and waterproof membranes rose 1% and 5% YoY to Rmb3.27bn and Rmb1.32bn.

2) Gross margin came under pressure due to fierce competition and falling prices in 2024: Gross margin fell 1.9ppt YoY to 29.6% (excluding tax and surcharges), as the ASP of coatings for home decoration and engineering projects changed nil and fell 11% YoY.

3) Expenses fell slightly: Full-year expense ratio fell 0.5ppt YoY, with selling and G&A expense ratios down 0.8ppt and up 0.4ppt YoY.

4) Profit was affected by impairments: Credit and asset impairment totaled Rmb349mn in 2024 (-Rmb163mn YoY), and operating profit after adding back impairment was Rmb625mn (vs. Rmb717mn in 2023).

5) Cash flow was strong: The cash-to-revenue ratio stayed at 115% in 2024, and the firm recorded net operating cash inflow of Rmb1.01bn (accounts receivable, inventory, and payable turnover days fell 11, 54, and 17 days YoY to 101, 47, 151 days).

6) Debt-to-asset ratio declined: Debt-to-asset ratio fell 2.1ppt YoY to 79% in 2024.

1Q25 Results. 1) Revenue grew steadily: In 1Q25, revenue from home decoration coatings, engineering coatings, and coating materials rose 8%, 9%, and 4.2% YoY. 2) Gross margin rose: In 1Q25, gross margin rose 2.7ppt YoY to 31% due to easing competition and price hikes in the sector.

3) Expense ratio fell 2.4ppt YoY to 31.5%, as selling and G&A expense ratios fell 1.6ppt and 0.3ppt YoY. 4) Cash flow remained strong: In 1Q25, the cash-to-revenue ratio reached 132%, and net operating cash flow increased Rmb374mn YoY to Rmb110mn.

Trends to watch

Service model conforms to the industrywide trend of competing for existing users; transformation towards high-end retail pays off. In recent years, the company has accelerated the expansion of its business models such as the Beautiful Village. It penetrated tier-1 and tier-2 and rural markets through its service models to acquire traffic and earn high product premiums, with its retail sales maintaining growth despite industrywide headwinds.

Competition eases marginally; raw material prices to boost growth. In 2025, we expect competition in the coatings industry to ease, and leading companies to raise product prices. In addition, the recent decline in oil prices may drive down prices of raw materials such as emulsions. We expect the firm’s gross margin to continue to recover, with its results showing resilience.

Financials and valuation

Given falling raw material prices, we raise our 2025 net profit forecast 8.5% to Rmb851mn and introduce 2026 our net profit forecast of Rmb1.1bn. The stock is trading at 30x 2025e and 23x 2026e P/E. We maintain an OUTPERFORM rating and raise our target price by 20% to Rmb60 to reflect improving risk appetite, implying 37x 2025e and 29x 2026e P/E with 23% upside.

Risks

Intensifying competition; sharper-than-expected decline in demand; disappointing retail expansion.