2024 results miss our expectations; 1Q25 results beat Sobute New Materials announced its 2024 results: Revenue fell 0.7%

YoY to Rmb3.6bn and attributable net profit fell 40% YoY to Rmb95.88mn.

In 4Q24, revenue rose 7% YoY to Rmb1.08bn, and attributable net profit fell 9% YoY to Rmb17.27mn. The firm's 2024 results miss our expectations, mainly due to falling gross margin and higher-than-expected impairment provisions.

The firm also announced its 1Q25 results: Revenue rose 18% YoY to Rmb0.68bn and attributable net profit grew 15% YoY to Rmb24.33mn. The firm's 1Q25 results slightly beat our expectations, mainly due to higher- than-expected sales volume.

2024: 1) Full-year sales volume recovered slightly; ASP declined. In

2024, the firm's sales volume of high-performance water-reducing admixtures (WRA), high-efficiency WRA, and functional materials changed +3%, -64%, and +16% YoY to 1.05mnt, 18,000t, and 0.31mnt, with ASPs changing -12%, +34%, and +11% YoY. 2) Gross margin under pressure. In 2024, the firm's gross margin fell 2.3ppt YoY to 32.8%. Specifically, gross margin of high-performance WRA and functional materials fell 4.4ppt and 0.9ppt YoY, while that of the testing business remained high at 52.9%. 3) Expense ratio dropped. In 2024, the firm's selling expense ratio edged up 0.1ppt YoY to 10.6%, its G&A and R&D expense ratios fell 0.5ppt and 0.8ppt YoY to 8% and 5.2%, and financial expense ratio stayed at 1.4% (largely flat YoY).

4) Impairment provision weighed on profit. In 2024, the firm made

about Rmb95.89mn of provisions for credit impairment losses and Rmb16.15mn of provisions for asset impairment losses, weighing on earnings.

5) Cash flow remained strong. The firm's net operating cash flow rose Rmb0.21bn YoY to about Rmb0.58bn in 2024. Dividend payout ratio fell 3.3ppt YoY to about 45%.

6) Technical service business maintained steady growth. In 2024,

revenue from the technological service business rose 0.8% YoY to Rmb762mn, and its net profit reached Rmb158mn (the firm holds a 58% stake in its technical service subsidiary).

2025: Sales volume of WRA and functional materials improved in 1Q25, but prices remained under pressure. In 1Q25, sales volume of

high-performance WRA rose 28% YoY, with ASP falling 4% YoY. Sales volume of functional materials rose 41% YoY, with ASP dropping 12% YoY.

Trends to watch Demand gradually recovered; profit recovery of WRA business

underway. We expect sales volume of WRA and functional materials to recover in 2025 amid the firm's efforts to increase investment in key projects. However, it may take time for gross margin to recover due to fierce competition and relatively low prices.

Financials and valuation

We keep our 2025 net profit forecast at Rmb135mn and introduce our 2026 net profit forecast of Rmb0.2bn. The stock is trading at 25x 2025e and 17x 2026e P/E. We maintain an OUTPERFORM rating, and, given improving risk appetite in the market, we raise our TP 12% to Rmb9.5, implying 31x 2025e and 21x 2026e P/E and offering 20% upside.

Risks

Demand recovery disappoints; stronger-than-expected pressure on impairments.