1H26 results missed our expectations

Oriental Yuhong announced its 1H26 results: Revenue rose 9.6% YoY to about Rmb14.87bn and net profit attributable to shareholders grew 8.7% YoY to Rmb613mn in 1H26. In 2Q26, revenue rose 0.8% YoY to around Rmb7.68bn, but attributable net profit fell 43.1% YoY to Rmb212mn. The firm's results missed expectations due to larger-than-expected impairment losses.

Retail business continued to expand thanks to penetration into lower-tier markets and the efforts to explore the market for renovation of existing properties. By channel, revenue from retail, construction projects, and direct sales channels totaled about Rmb6.35bn, Rmb6.38bn and Rmb2.02bn in 1H26, implying YoY changes of +25.4%, +0.5%, and -0.6%.

The firm’s subsidiary Civil Construction Group recorded revenue of about Rmb5.06bn in 1H26, up 6.7% YoY thanks to penetration into lower-tier markets and rising demand for renovation of existing properties. By product, revenue from coils, coatings, mortar, and project construction totaled Rmb5.76bn, Rmb4.20bn, Rmb2.08bn, and Rmb640mn in 1H26, implying YoY changes of +4.6%, +6.4%, +4.3%, and -24.5%, with revenue contribution from material-related products rising further.

Profitability recovered thanks to optimized channel structure and smooth pass-through of price hikes. 1H26 blended gross margin rose 2ppt YoY to 27.4%. In 2Q26, the firm’s gross margin grew 1ppt YoY to 27.7%, with gross margin of retail, construction projects, and direct sales channels at 32.8%, 23.5%, and 23.5%, implying YoY changes of +0.7ppt, +2.8ppt, and -0.9ppt. We attribute the gross margin recovery to a rising proportion of high-margin retail business (accounting for 42.68% of total revenue in 1H26) and smooth implementation of price hikes.

Impairment losses and expenses eroded profit. In 1H26, the firm made provisions for asset and credit impairment losses of Rmb129mn and Rmb567mn (up Rmb291mn YoY). Its operating profit in 2Q26 rose 3.8% YoY excluding the impact of impairment. In 1H26, selling and R&D expense ratios fell 0.7ppt and 0.3ppt, but G&A and financial expense ratios rose 0.5ppt and 0.2ppt YoY due to rising salaries, depreciation expenses and FX losses.

Trends to watch

Industry supply continues to decline; overseas expansion to create a new growth engine. We expect the industry to become more concentrated in 2026. We think the stability of prices for construction projects still depends on the coordination of leading companies. In our view, the renovation of existing projects may provide the core support to offset the decline in demand from real estate developers. In 1H26, the firm’s overseas revenue rose 207.6% YoY to Rmb1.77bn, with revenue contribution growing to 11.9%. M&A projects in Brazil and Indonesia have been completed, and construction of overseas bases is well underway.

Financials and valuation

Given the lingering impairment pressure caused by the prolonged aging of accounts receivable, we lower our 2026 and 2027 attributable net profit forecasts 8.6% and 2.7% to Rmb1.65bn and Rmb2.03bn. The stock is trading at 16.2x and 13.1x 2026e and 2027e P/E. We maintain an OUTPERFORM rating. Given changes in preferences for market liquidity, we cut our TP 28.6% to Rmb15.0, implying 21.8x and 17.7x 2026e and 2027e P/E and offering 34.7% upside.

Risks

Disappointing demand recovery; volatile raw material prices; fiercer-than-expected competition.