1Q25 results largely in line with our expectation

Beijing New Building Materials announced its 1Q25 results: Revenue rose 5% YoY to Rmb6.25bn, net profit attributable to shareholders grew 2.5% YoY to Rmb842mn and recurring net profit rose 3.5% YoY to Rmb819mn, largely in line with our expectation.

Revenue and profit remained solid in 1Q25 despite a high base.

Sales volume of gypsum boards grew rapidly amid price hikes. Despite high sales volume growth of nearly 20% in 1Q24, the firm’s gypsum board sales volume continued to grow in 1Q25. We estimate that the firm's sales volume rose 4% YoY to 0.58bn sqm in 1Q25 (with sales volume of the Dragon brand under slight pressure and sales volume of the Taishan brand up 7% YoY). Amid product price hikes, the overall ASP of gypsum boards remained largely flat QoQ in 1Q25 (ASP of the Dragon brand rose by Rmb0.3/sqm and ASP of the Taishan brand remained largely stable). However, the ASP fell 10% YoY due to high product prices last year, and we estimate that the revenue and gross profit of the gypsum board business dropped 6% YoY and 7% YoY.

New businesses continued to grow. The firm's waterproof product business grew faster than the broader market thanks to its cooperation with central SOEs and distribution channel expansion, with revenue rising 11% YoY to Rmb1,054mn in 1Q25. Meanwhile, the firm’s revenue from the coatings business rose 111% YoY to Rmb0.91bn thanks to the consolidation of Carpoly’s financial statements in March 2024, which we think contributes most of the firm’s incremental revenue growth in 1Q25.

Gross margin remained stable. Due to rising sales volume but falling prices, gross margin of the gypsum board business remained largely stable, but gross profit per sqm declined YoY. Coupled with a rising contribution from the high-gross-margin coating business, the firm's overall gross margin rose 0.3ppt YoY to 28.9% (gross profit grew 6% YoY to Rmb1.73bn) in 1Q25.

Expense ratio rose slightly. In 1Q25, the firm’s overall expense ratio rose 0.3ppt YoY to 13.7% mainly due to high expenses in January- February, with selling expenses rising 27% YoY (selling expense ratio up 1ppt), but G&A, R&D, and financial expense ratios falling 0.2ppt, 0.5ppt, and 0.1ppt YoY. The firm’s operating profit margin fell 0.4ppt YoY to 15% in　1Q25. The firm’s net profit margin remained largely stable. Its effective tax rate remained low, and its net profit margin fell 0.3ppt YoY to 13.5%.

Quality of operations remained high. Quarterly cash outflow: In 1Q25, the firm’s cash-to-revenue ratio fell 4ppt YoY to 64%, as receivables rose by Rmb2.5bn QoQ to Rmb5.1bn, payables rose by Rmb0.51bn QoQ, and net operating cash flow was -Rmb222mn. Debt-to-asset ratio remained solid: The firm's debt-to-asset ratio was only 24% in 1Q25 (-3.9ppt YoY).

Trends to watch

Gypsum board business resilient; growth of waterproof product and coating businesses accelerating; M&As likely. We believe the firm's gypsum board business is accelerating the shift to consumer building materials (revenue from home decoration market for gypsum board products rose 17% YoY and revenue from county and township markets for gypsum board products grew 21% YoY in 2024), and we expect the firm to improve product differentiation and maintain high earnings in the business segment through home decoration and finishing. Meanwhile, we expect the waterproof product and coating business segments to maintain rapid growth on the back of high-quality cash flow, and the firm to gradually acquire companies with production capacity in regions with weak capabilities in waterproof products or industrial coating companies.

Financials and valuation

We keep our 2025 and 2026 earnings forecasts unchanged. The stock is trading at 11x 2025e and 9.2x 2026e P/E. We maintain our OUTPERFORM rating and target price of Rmb36, implying 13x 2025e and 11x 2026e P/E, offering 20% upside.

Risks

Disappointing recovery of gypsum board demand; disappointing integration of coatings business; slower-than-expected growth of waterproof product business.