Results Review

3Q26 results in line with our expectations

The company announced its 1–3Q26 results. Revenue declined 4.17% YoY to Rmb19.08bn, while attributable net profit fell 26% YoY to nearly Rmb1.91bn. Recurring net profit dropped 26.40% YoY to Rmb1.86bn. In 3Q26 alone, revenue rose 1.54% YoY to nearly Rmb6.45bn. Attributable net profit fell 19.40% YoY to Rmb529mn, and recurring net profit fell 14.64% YoY to Rmb545mn. The results align with our expectations, as the profit decline narrowed and revenue returned to positive YoY growth.

Trends to watch

Downturns in the gypsum board business dragged on overall profitability, while rising raw material prices squeezed gross profits in the waterproofing and coatings segments. Blended GM fell 2.0ppt YoY to 25.8% in 3Q26, and cumulative GM for the first three quarters fell 1.8ppt YoY to 27.8%. Net margin fell 2.1ppt YoY to 8.2% in 3Q26 and 3.0ppt YoY to 10.3% for the first three quarters. The company managed period expenses well, with its expense ratio falling 0.5ppt YoY to 15.7% in 3Q26. R&D spending stayed firm, rising 3.93% YoY to Rmb304mn.

We expect profitability to recover more slowly than revenue in the near term, and we advise close monitoring of project execution progress.

Accounts receivable turnover remained stable, though operating cash flow came under temporary pressure. Accounts receivable turnover days in 3Q26 stood at 60 days, largely flat YoY, while inventory turnover days reached 53 days, up one day YoY. Net operating cash flow fell 84.13% YoY to Rmb92mn. Operating cash flow reached Rmb777mn in 1–3Q26, down 49.55% YoY, mainly due to higher cash payments for goods and services YoY.

The "one body, two wings, and global layout" strategy remains unchanged. Amid weak demand, the company has adopted more flexible operating strategies and focuses more on balancing volume, price, and cost. The gypsum board business provides a solid cash flow foundation. The waterproofing segment continues to strengthen through the M&A of Yuanda Hongyu. The coatings segment remains the primary engine for revenue growth. Overseas revenue has grown rapidly, unleashing long-term growth potential.

Financials and valuation

Factoring in weak industry demand and intensifying competition, we cut our 2026 and 2027 attributable net profit forecasts 6.30% and 4.70% to Rmb2.44bn and Rmb2.76bn. The stock is trading at 11.5x 2026e and 10.2x 2027e P/E. We maintain our OUTPERFORM rating and cut target price by 12.0% to Rmb22.00, implying 15.3x 2026e and 13.6x 2027e P/E, offering 33.20% upside.

Risks

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