1Q25 results miss our expectations

Weixing New Building Materials announced its 1Q25 results: Revenue fell 10% YoY to Rmb895mn; net profit attributable to shareholders fell 26% YoY to Rmb114mn; recurring net profit fell 19% YoY to about Rmb114mn, missing our and market expectations, mainly due to heavier-than-expected pressure on the retail sector.

1) Revenue was under pressure: Revenue fell 10% YoY in 1Q25 (vs. a decline of 5% in 4Q24). We attribute this to pressured market demand and pressure on the firm’s retail segment, which we think may have declined at a rate close to that of total revenue.

2) Gross margin fell: Due to intensifying competition, the firm’s blended gross margin fell 1ppt YoY to 40.5% in 1Q25, resulting in gross profit falling 12.5% YoY to Rmb352mn.

3) Expenses fell, but expense ratio rose due to lower interest. The firm controlled its selling expenses, which declined 11% YoY in 1Q25. Its G&A and R&D expenses fell 5% and 10% YoY, while financial interest income fell Rmb13.12mn YoY, pushing the expense ratio up 1.6ppt YoY to 25% (financial expense ratio up 1.3ppt).

4) Investment income fell: As investment income was -Rmb5.56mn in 1Q25 (vs. +Rmb2.84mn in the same period last year), the firm’s operating profit fell 26% YoY to Rmb136mn in 1Q25, with operating profit margin down 3.3ppt YoY to 15%.

5) Cash flow remained strong. In 1Q25, the cash flow-to-revenue ratio rose 15ppt YoY to 133%, driving operating cash flow up Rmb261mn YoY to Rmb85mn. Business operations remained solid. The firm still had net cash, and its debt-to-asset ratio was only 19% in 1Q25.

Trends to watch

Strong competitive advantages and new product categories may support stable profit. We believe the firm’s high dividend payout underscores its investment value in the long term. Looking further into 2025, we think demand for pipes for home decoration may be weak amid persistent pressure, and price competition may disrupt the firm’s high- gross-margin model. However, we expect the firm to maintain solid profit in 2025 despite pressure from the operating environment by increasing　　expenses, strengthening service empowerment and accelerating the implementation of waterproof business.

In the near term, we think the firm may face headwinds from expenses and impairments. However, in the long term, we expect the firm to better adapt to changing market conditions, which would be dominated by demand from existing construction projects, and to seize opportunities in fragmented demand and higher-end markets, thereby maintaining solid core profit. Meanwhile, as a high-dividend company, the company can continue to deliver quality returns to the market, in our view.

Financials and valuation

We keep our earnings forecasts largely unchanged. The stock is trading at 20x 2025e and 18x 2026e P/E. We maintain an OUTPERFORM rating and target price of Rmb14, implying 23x 2025e and 21x 2026e P/E, offering 14% upside.

Risks

Sharper-than-expected decline in demand from completed property projects; disappointing new business expansion.