1H25 results slightly miss our expectations

The firm announced its 1H25 results: Revenue fell 0.29% YoY to Rmb13.6bn, and net profit attributable to shareholders fell 12.9% YoY to Rmb1.9bn. In 2Q25, revenue fell 4.5% YoY to Rmb7.3bn and attributable net profit fell 21.9% YoY to Rmb1.1bn. The firm's results in 1H25 slightly missed our expectations, which we attribute to pressure on the profit margin of the gypsum board business.

Gypsum board business under pressure; profit margin slightly fell YoY. In 1H25, revenue from gypsum boards fell 8.6% YoY to Rmb6.7bn, with GM down 0.94ppt YoY to 38.68%. We estimate the firm's revenue from gypsum boards fell 6% YoY and gross profit fell 4% YoY in 2Q25.

New businesses continued to grow; coatings segment performed well. The firm continued to update its waterproof products based on market demand. In 1H25, revenue from the waterproofing segment rose 6% YoY to Rmb2.5bn, with revenue from waterproof membranes, engineering and coatings up 0.6%, down 1.8%, and up 30.7% YoY, and GM of the waterproofing segment fell 1.7ppt YoY to 18.6%. The firm's high-end brand strategy paid off. Revenue from the coating segment jumped 44.4% YoY in 1H25 to Rmb2.2bn with GM up 1ppt YoY to 32.5%.

Improving product mix helps maintain stable overall GM. In 1H25, blended GM fell 0.6ppt YoY to 30.3% (before tax and surcharges). We think the firm's GM remained relatively stable thanks to its efforts to develop new products and increase exposure to high-margin coating products. In 2Q25, GM (before tax and surcharges) fell 1.2ppt YoY and rose 2.6ppt QoQ to 31.5%.

Expense ratio edged up. In 1H25, the firm's expense ratio rose 0.6ppt YoY to 13.4%, which we attribute to rising selling expense ratio (+0.7ppt YoY) driven by new product promotion. In 2Q25, the period expense ratio rose 0.8ppt YoY and fell 0.6ppt QoQ to 13.1%.

Net operating cash flow came under pressure due to the high base caused by financial consolidation. In 1H25, the cash-to-revenue ratio fell 25ppt YoY to 76%, and net operating cash flow fell 52.9% YoY to Rmb0.96bn, mainly due to a high base for cash flow caused by the consolidation of Carpoly into the firm's financial statements in 1H24. Accounts receivable turnover days increased 25 days to 57 days, and　accounts payable turnover days increased 11 days to 49 days, compared to end-2024.

Trends to watch

Gypsum board resilient; growth of waterproofing and coating businesses accelerating; M&A ahead. We believe the firm's gypsum board business is accelerating its shift to consumer building materials (revenue from gypsum boards for home decoration and from county and township markets rose 17% and 21% YoY in 2024). We expect the company to improve product differentiation and maintain high earnings in the segment through home decoration and finishing.

Meanwhile, we expect the waterproofing and coating segments to maintain rapid growth on the back of high-quality cash flow, and the firm to gradually acquire companies with production capacity or industrial coatings in regions where its presence is relatively weak.

Financials and valuation

As earnings of the gypsum board business are under pressure, we lower our 2025 and 2026 net profit forecast by 16% and 2% to Rmb3.88bn and Rmb5.42bn, respectively. The stock is trading at 11.6x 2025e and 8.3x 2026e P/E. Given the valuation support from new businesses, we maintain an OUTPERFORM rating and target price of Rmb36, implying 15.7x 2025e and 11.2x 2026e P/E and implying 35% upside.

Risks

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