1H24 results in line with our expectations

Sobute New Materials announced its 1H24 results: Revenue fell 5.86% YoY to Rmb1,563bn, and attributable net profit dropped 45.06% YoY to Rmb53.29mn. In 2Q24, revenue fell 1.04% YoY to Rmb985mn and attributable net profit dropped 43.08% YoY to Rmb32.2mn. The firm's 1H24 results are in line with our expectations.

Market demand declined; volume and prices of admixture under pressure. In 1H24, sales volume of the firm's core product - high- performance water-reducing admixtures (WRA) - fell 5.7% YoY to 457,300t, with ASP dropping by 11.0% YoY. Against the backdrop of falling demand and fierce price competition, sales volume and prices of the firm's admixtures came under pressure in 1H24. In 2Q24, sales volume of high- performance WRA rose 0.7% YoY to about 298,700t, with ASP falling 11.3% YoY to Rmb1,782/t (QoQ growth largely stable).

Sales volume and prices of functional materials increased despite headwinds. In 1H24, sales volume of functional materials rose 17.4% YoY to 128,000t, and ASP rose 6.5% YoY. Its functional material business maintained revenue growth of about 25% despite unfavorable market conditions. In 2Q24, sales volume of functional materials rose 30.4% YoY to 82,400t, with ASP rising 3.0% YoY to Rmb2,030/t.

Gross margin declined. In 1H24, the firm's blended gross margin fell 1.3ppt YoY to 34.9%.

Overall expense ratio increased. In 1H24, the firm's selling, G&A, and financial expense ratios rose 0.6ppt, 0.7ppt, and 0.5ppt YoY amid falling revenue.

Impairment to a large extent affected 2Q24 earnings. Due to the shortage of funds along the value chain in 1H24, the firm's credit impairment loss was about Rmb9.63mn in 1H24 (about Rmb36.95mn in 2Q24), weighing on its earnings.

Strengthened contract settlement and strong cash flow. Net operating cash flow was about Rmb72.46mn in 1H24 (vs. -Rmb163mn in 1H23), thanks to the firm's efforts to strengthen contract settlement and optimize procurement decisions.

Trends to watch

Demand to improve marginally in 2H24; functional material business will likely maintain strong growth momentum. We expect downstream demand to marginally recover in 2H24 as special government bonds and treasury bonds become available and fiscal support is strengthened.

Against this backdrop, sales volume and prices of the firm's core admixture products will likely recover. In 1H24, the company's functional material business enjoyed strong growth momentum and resilient prices despite headwinds. We believe its flagship functional materials (e.g., anti- cracking materials) will be widely used in infrastructure construction; as a result, sales volume and revenue of its functional materials will likely continue to increase rapidly.

Financials and valuation

Due to sharper-than-expected downward pressure on sales volume and prices of the firm's core products, we cut our 2024 and 2025 attributable net profit forecasts 20% and 21% to Rmb120mn and Rmb135mn. The stock is trading at 25.8x 2024e and 22.9x 2025e P/E. We maintain an OUTPERFORM rating and cut our target price 16% to Rmb8.5, implying 30.6x 2024e and 27.2x 2025e P/E, offering 19% upside.

Risks

Disappointing demand recovery; fiercer-than-expected price competition.