1H26 results miss our expectations

In 1H26, the firm’s revenue fell 6.84% YoY to Rmb12.63bn and net profit attributable to shareholders fell 28.72% YoY to Rmb1.38bn. In 2Q26, revenue dropped 11.54% YoY to Rmb6.47bn and attributable net profit fell 47.43% YoY to Rmb572mn. The firm's results missed our expectations, mainly due to falling gross margin amid demand pressure and rising expense ratio.

Weak demand weighed on gypsum board business; profitability weakened. In 1H26, revenue from gypsum boards and keels fell 13.43% and 16.69% YoY to Rmb5.78bn and Rmb947mn, with gross margin dropping 1.88ppt and 6.19ppt YoY to 36.8% and 15.46%, respectively. We attribute this to weak demand weighing on sales volume and rising raw material costs weighing on profitability.

Waterproofing and coating businesses developed despite headwinds, demonstrating resilience. In 1H26, revenue from waterproofing and coating businesses rose 5.57% and 1.41% YoY to Rmb2.63bn and Rmb2.19bn, with gross margin changing +3.3ppt and -0.48ppt YoY to 21.94% and 31.99%. We attribute this to smooth pass-through of price hikes for waterproof materials and an optimized competitive landscape amid rising industry concentration. The firm completed the acquisition and restructuring of Yuanda Hongyu in 1H26, further improving its production capacity.

Increased expenses weighed on profit. Blended gross margin fell 1.56ppt YoY to 28.79% in 1H26, and fell 3.51ppt YoY and 1.55ppt QoQ to 28.03% in 2Q26. In 1H26, expense ratio rose 1.85ppt YoY to 15.22%. Specifically, selling and G&A expense ratios rose 0.82ppt and 0.47ppt to 5.98% and 5.15%, with SG&A expense ratio up Rmb141mn YoY. We attribute this mainly to labor costs, expenses related to depreciation and amortization, and expenses related to share-based payments.

Trends to watch

Overseas sales and new products to serve as long-term growth drivers; clear strategic goals. In 1H26, the firm's overseas sales revenue rose 26.41% YoY to Rmb409mn, and overseas markets may gradually become a new growth driver. Meanwhile, the firm continues to develop high value-added products such as gypsum fiberboard and Luban all-purpose boards. We expect the category expansion to boost the firm’s growth potential.

Financials and valuation

Due to intensifying competition, we lower our 2026 and 2027 attributable net profit forecasts 21.8% and 27.3% to Rmb2.6bn and Rmb2.89bn. The stock is trading at 11.1x 2026e and 10x 2027e P/E. Considering the firm's operational resilience and leading advantages under its strategy of “focusing on the gypsum board business while developing waterproofing and coating businesses”, we maintain an OUTPERFORM rating and cut our TP 21.9% to Rmb25, implying 16.4x 2026e and 14.7x 2027e P/E and implying 47.2% upside.

Risks

Sharper-than-expected decline in demand for gypsum board; sharper-than-expected rise in raw material and fuel costs.