2025 and 1Q26 earnings miss our expectations

Skshu Paint announced its 2025 results: Revenue rose 3.5% YoY to Rmb12.5bn and net profit attributable to shareholders grew 133% YoY to Rmb0.77bn. The firm's earnings missed our expectations, mainly because: 1) The YoY decline in its expense ratio in 2025 was smaller than we expected; 2) the firm's fullyear credit impairment and asset impairment losses totaled about Rmb0.26bn, slightly higher than our expectation; and 3) the firm's effective tax rate increased.

In 1Q26, the firm’s revenue rose 14% YoY to Rmb2.4bn and net profit attributable to shareholders grew 1.5% YoY to Rmb107mn, slightly missing our expectation, as the proportion of revenue from low-gross-margin products (e.g., ancillary and waterproof materials) in total revenue increased. As a result, the firm’s gross margin stayed flat YoY, slightly below our expectation.

Trends to watch

Transformation towards retail business paying off; falling raw material prices boosted gross margin. In 2025, the firm's revenue from wall paint products for home decoration rose 15% YoY to Rmb3.4bn and that from wall paint products for engineering projects fell 5% YoY to Rmb3.9bn. The firm’s sales volume of wall paint products for home decoration grew 17% YoY to 0.57mnt and that of wall paint products for engineering projects rose 0.8% YoY to 1.17mnt, showing that the firm's transformation towards retail business is paying off. In addition, gross margin of the firm's wall paint products for home decoration (taxes and surcharges not excluded, the same below) rose 3.9ppt YoY to 50.8%, and that of wall paint products for engineering projects rose 4.6ppt YoY to 37.6%, possibly due to falling raw material prices

Expense control missed our expectation. In 2025, the firm's overall expense ratio fell 0.6ppt YoY to 25.1%, and its selling and G&A expense ratios remained largely flat. We think the firm’s expense control slightly missed our expectation.

Due to impact of goodwill impairments, impairment losses slightly beat our expectation. The firm's credit impairment and asset impairment losses totaled about Rmb0.26bn in 2025, slightly beating our expectation due to impact of goodwill impairments (about Rmb30mn).

Effective tax rate increased. The firm’s effective tax rate reached 22% in 2025, possibly because it no longer enjoyed the tax rate of high-tech and innovative enterprises.

Cash flow remained ample. The firm's net operating cash flow reached Rmb1.9bn, with receivable, payable, and inventory turnover days at 87, 150, and 32 days. The firm’s receivable turnover days fell by 14 days YoY.

Gross margin stayed flat YoY in 1Q26; expense ratio edged down, possibly passing on cost pressure for consumer business. The firm's gross margin stayed flat YoY at 30.8% in 1Q26. We think that the firm's shipments of ancillary and waterproof materials increased slightly in 1Q26, but gross margin of these products was lower than that of its main business. The firm’s expense ratio fell YoY to 28% in 1Q26.

Financials and valuation

We keep our 2026 and 2027 attributable net profit forecasts at Rmb1.11bn and Rmb1.38bn. The stock is trading at 31.7x 2026e and 25.3x 2027e P/E. We maintain an OUTPERFORM rating and our target price of Rmb60, implying 40.0x 2026e and 32.0x 2027e P/E and offering 26.3% upside.

Risks

Disappointing demand growth; sharper-than-expected rise in raw material prices; intensifying competition.