3Q25 results miss our expectations

Oriental Yuhong Waterproof announced its 3Q25 results: In 1–3Q25, revenue fell 5% YoY to Rmb20.6bn, and net profitattributable to shareholders fell 37% YoY to Rmb0.81bn. In3Q25, revenue increased 8.5% YoY to Rmb7bn, and attributablenet profit fell 27% YoY to Rmb245mn. The firm's revenue grewYoY in 3Q25 thanks to efforts to optimize distribution channels.However, its blended gross margin missed our expectations,possibly due to quarterly differences in product mix and productrebates.

The firm recorded positive revenue growth in 3Q25. In3Q25, the firm's revenue rose 8.5% YoY to Rmb7bn, and itsquarterly revenue growth turned positive, indicating that aninflection point has emerged. The firm's retail businessmaintained growth, and ASP of its products remained stable dueto price hikes in the engineering channel. The firm stepped upefforts to expand its presence in overseas markets, contributingincremental revenue.

Gross margin fell marginally YoY and QoQ in 3Q25,possibly due to quarterly fluctuations in product mix. Thefirm's blended gross margin fell 4.1ppt YoY and 1.9ppt QoQ to24.8% in 3Q25, and its earnings missed our forecast due tofalling gross margin. We attribute this to a rising proportion oflow-margin products such as mortar powder and quarterlyrebates for some products. The firm continued to explore thepotential of fee cuts, and its cash flow also improved.

In 3Q25, the firm’s expense ratio fell 2.8ppt YoY and 1.4ppt QoQto 15.7%, mainly because selling expense ratio fell 3.4ppt YoYand 1.3ppt QoQ to 7.7%. The firm made Rmb0.29bn ofimpairment provisions in 3Q25 and Rmb0.72bn of impairmentprovisions in 1–3Q25, implying a relatively even pace ofprovision. In addition, the firm’s net cash flow from operatingactivities reached Rmb812mn in 3Q25, further reflecting the trend of channel optimization and improving cash flow.

Trends to watch

We expect the company, as an industry leader, to optimizedistribution channels and expand presence in overseasmarkets. In our view, prices in the waterproof material industrystabilized in 3Q25. Given that the decline in new-starts GFAslightly narrowed in 2026, and demand remained underpressure, we think prices of construction projects will depend onthe collaboration between leading companies. The firm isactively seeking alpha by optimizing its distribution channels andexpanding its presence in overseas markets. The firm disclosedthat it has signed a share sale and purchase agreement for theConstrumart project in Chile, and that construction of the PhaseI TPO production line at its Houston factory is underway.

Financials and valuation

Given lower-than-expected 3Q25 gross margin, we cut our 2025EPS forecast 26% to Rmb0.41 and maintain our 2026 EPSforecast at Rmb0.75. The stock is trading at 32x 2025e and 17x2026e P/E. We maintain an OUTPERFORM rating and ourtarget price of Rmb16, implying 39x 2025e and 21x 2026e P/E,offering 22% upside, considering the firm’s earnings growth inoverseas markets and improving distribution channels.

Risks

Weaker-than-expected demand; volatile raw material prices;i ntensifying market competition.