1H25 results in line with our expectations

The firm announced its 1H25 results: Revenue rose 0.97% YoY to Rmb5.82bn; attributable net profit grew 108% YoY to Rmb436mn; recurring net profit rose 268% YoY to around Rmb292mn. In 2Q25, revenue fell 0.24% YoY to Rmb3.69bn, attributable net profit grew 103% YoY to about Rmb331mn, and recurring net profit rose 96% YoY to approximately Rmb307mn. The results were in line with our expectations and close to the upper limit of the firm's preannouncement.

Trends to watch

Revenue remains solid; strong growth of new businesses bolsters the growth of coatings for home decoration. In 1H25, revenue from

home decoration coatings and basic auxiliary materials rose 8% and 10% YoY to Rmb1.57bn and Rmb1.73bn; while revenue from engineering coatings and waterproof materials fell 2% and 29% YoY to Rmb1.80bn and Rmb460mn. In 2Q25, sales volume rose 1.4% YoY for home decoration coatings, 0.1% for engineering coatings, and 33% for basic auxiliary materials, while falling 29% YoY for waterproof materials.

In 2Q25, ASP rose 7% YoY for home decoration coatings and 4% for basic auxiliary materials, while falling 7% for engineering coatings and 4% for waterproof materials. We attribute the growth of home decoration coatings to the strong growth of three new businesses: Mashangzhu, Beautiful Countryside, and Art Paint.

Blended GM rose on continued transformation towards high-end retail and a YoY decline in raw material prices. In 1H25, the firm's

blended GM (taxes and surcharges not deducted, the same below) rose 4ppt YoY to 32%, with the GM of coatings for home decoration up 5.5ppt YoY to 49.4% and coatings for public building decoration up 2.9ppt YoY to 35.4%. We attribute the rise in blended GM to the improvement of the coating structure. The YoY decline in prices of raw materials such as emulsion and titanium dioxide also boosted profit.

In 2Q25, the ASP of coatings for home decoration rose 6% QoQ. Home decoration still benefited from a rising proportion of mid-range and high- end products. The ASP of coatings for engineering projects fell 1% QoQ.

In our view, given the background of anti-involution and industry leaders' changes in pricing strategies, price pressure on the engineering side may 　　ease marginally. In 2Q25, the firm's blended GM rose 4ppt YoY and 2ppt QoQ to 33%.

Expense control is effective; the expense ratio fell YoY. The firm

strengthened expense control through precise measures. It optimized its expense structure and improved the efficiency of capital use. Its expense ratio fell 2ppt YoY to 24% in 1H25 and 1.2ppt YoY to 19.2% in 2Q25, mainly due to YoY improvement in selling and financial expense ratios.

Looking ahead, we believe the firm's overall expense ratio still has room to decline, as its three new businesses improve per-capita efficiency and the firm continues to reduce the size of its sales team in the traditional construction business.

Net margin reached 12% in 2Q25 after adding back impairment, and

cash flow improved. In 1H25, the firm made Rmb101mn of provisions for impairment, including Rmb86.86mn of credit impairment and Rmb13.77mn of asset impairment. If credit and asset impairment are added back, the firm's operating net margin would rise 2.3ppt YoY and 2.5ppt QoQ to 12% in 2Q25, both improving. In addition, the firm's cash-to-revenue ratio was 107% in 1H25; net operating cash flow was Rmb351mn; days sales outstanding fell 16 YoY to 105 days; and days payable outstanding fell two YoY to 162 days.

Financials and valuation

We maintain our 2025 and 2026 attributable net profit forecasts at Rmb851mn and Rmb1.10bn. The stock is trading at 39x 2025e and 30x 2026e P/E. We maintain an OUTPERFORM rating and target price of Rmb60, implying 52x 2025e and 40x 2026e P/E, offering 32% upside.

Risks

Intensifying competition; sharper-than-expected decline in demand.