1H25 results slightly miss our expectation

Oriental Yuhong Waterproof announced its 1H25 results: Revenue fell 11% YoY to Rmb13.6bn and net profit attributable to shareholders fell 40% YoY to Rmb564mn in 1H25. In 2Q25, revenue -6% YoY and +28% QoQ to Rmb7.6bn; attributable net profit -38% YoY and +93% QoQ to Rmb372mn. The firm's results slightly missed our expectations, possibly due to weaker- than-expected market demand.

Trends to watch

Household-related business improves marginally; the firm steps up efforts to expand presence in overseas markets. By channel: According to corporate filings, revenue from retail, wholesale and direct sales fell 7%, 5% and 28% YoY to Rmb5.1bn, Rmb6.3bn, and Rmb2.0bn in 1H25, and the combined revenue contribution from wholesale and retail channels rose to about 84%. In 2Q25, revenue from household users grew more than 10% YoY, showing marginal improvement. By product: In 1H25, revenue from coiled materials, coatings, mortar, and project construction fell 9%, 17%, 6%, and 32% YoY to Rmb5.5bn, Rmb3.9bn, Rmb2.0bn, and Rmb0.8bn.

The firm has generated synergies in its nationwide distribution channel network by leveraging its waterproof business. As such, its non-waterproof business (e.g., sand powder) grew rapidly, providing a new growth driver to the firm. In addition, in overseas markets, the firm disclosed that the production line at its production, R&D and logistics base in Malaysia has successfully completed first round of trial production; the firm has signed a share transfer agreement on the acquisition of the Construmart project in Chile; the construction of the Phase I TPO production line at the Houston factory is underway.

Amid the gradual implementation of price hikes, we believe gross margin may continue to trend upward. In 1H25, the firm's blended gross margin fell 3.8ppt YoY to 25.4%1, as demand was under pressure in 2H24 and the firm cut prices of its products for business and household applications. However, the firm's gross margin rose 3ppt QoQ to 26.7% in 2Q25, thanks to the first round of price hikes in products for business users and a rising proportion of high-margin projects for household users. By channel, gross margin of the firm's retail, wholesale and direct sales　businesses -8.6ppt, -2.6ppt and +1.5ppt YoY to 32%, 21% and 24% in 1H25. In our view, if cost fluctuations are controllable, the firm’s blended gross margin may continue rising, driven by the first round of price hikes in products for household applications and the second round of price hikes in products for business applications2.

The firm continued to explore the potential of expense reduction; its net operating cash flow improved marginally. In 1H25, expense ratio fell 1.5ppt YoY to 17%; selling, G&A, and R&D expense ratios fell 0.9ppt, 0.4ppt, and 0.2ppt YoY; financial expense ratio remained largely flat due to declines in employee compensation, promotional expenses, advertising expenses, and business reception expenditures. Credit impairment reduced profit by Rmb430mn in 1H25 and by Rmb286mn in 2Q25. After excluding the impact of the credit impairment, operating profit margin was about 8.6% in 2Q25, with YoY decline narrowing to 1ppt. Net operating cash flow was - Rmb400mn in 1H25, marginally improving YoY (vs. -Rmb1.3bn a year earlier).

Financials and valuation

Considering demand is slightly lower than we expected, we cut our shipment assumption. However, considering the firm's better-than-expected expense ratio control, we maintain our 2025 EPS forecast of Rmb0.55. We cut our 2026 EPS forecast by 11% to Rmb0.75 due to uncertainties in demand. The stock is trading at 23x 2025e and 17x 2026e P/E. We maintain an OUTPERFORM rating and TP of Rmb16, implying 29x and 21x 2025e and 2026e P/E and offering 28% upside.

Risks

Changes in industry policies; weaker-than-expected demand; fluctuations in raw material prices; intensifying market competition.