2Q25 results in line with our expectations

Weixing New Building Materials announced its 1H25 results: Revenue fell 11% YoY to Rmb2.08bn, net profit attributable to shareholders fell 20% YoY to Rmb271mn, and recurring net profit fell 21% YoY to Rmb268mn.

In 2Q25, revenue fell 12% YoY to around Rmb1.18bn, attributable net profit fell 13% YoY to Rmb163mn and recurring attributable net profit dropped 22% YoY to Rmb154mn, in line with our expectations.

Challenges in business environment weigh on YoY sales volume and ASP of pipeline business. In 1H25, revenue from PPR, PE, and PVC pipes fell 13%, 13%, and 4% YoY to Rmb933mn, Rmb411mn, and Rmb290mn, as the retail and engineering businesses contracted due to weak market demand, weighing on sales volume and ASP of pipes.

However, the decline was milder than the industry average. Revenue from other products (waterproofing and water purification) fell 8% YoY to Rmb425mn in 1H25, with waterproofing prices under pressure due to fierce competition but sales volume remaining stable.

Gross margin stable QoQ; focus on high-end PPR pipeline market. In 1H25, gross margins of PPR, PE, PVC, and other products -1.6ppt, - 2.8ppt, +2.6ppt, and -1.9ppt YoY to 58%, 27%, 24%, and 29%. Overall gross margin fell 0.6ppt YoY and 4.3ppt HoH to 39%. We believe the firm’s efforts to develop high-end products and measures to tackle “involution- style” competition will help maintain relatively solid earnings.

Expense ratio remained largely stable in 1H25 and edged down QoQ in 2Q25. Expense ratio rose 0.8ppt YoY to 25% in 1H25, and rose 0.2ppt YoY but fell 0.8ppt QoQ to 24.6% in 2Q25, with overall expense ratio remaining relatively stable.

Net investment loss narrowed. In 1H25, the firm suffered a net investment loss of Rmb6.02mn, vs. a loss of Rmb15.84mn in 1H24, possibly due to losses from Kerui project and delays in Jieliu project.

Cash flow remained strong; dividend payout ratio edged down but stayed high. In 1H25, net operating cash flow reached Rmb581mn, with the cash-to-revenue ratio rising 5.9ppt YoY to 119%. Capex fell 16% YoY to Rmb145mn, and free cash flow stood at Rmb440mn. The firm announced an interim dividend of Rmb0.1/sh, implying an interim dividend payout ratio of 58%.

Trends to watch

Operations of home decoration and engineering pipes still face challenges, but the firm is committed to high quality and exploring new product categories. In 2H25, we think demand for pipes used in home decoration may remain under pressure, and the firm’s engineering pipe operations may still face some external challenges due to funding constraints for infrastructure projects. However, it has maintained relatively stable revenue and earnings by focusing on high-end products, developing new products to enhance product competitiveness, and upgrading business models. In addition, the waterproof business continues to expand and the water purification business model continues to improve, which may become a new earnings growth driver.

Financials and valuation

As the pipeline business is under pressure and integration of new businesses takes time, we cut our 2025 and 2026 EPS forecasts by 11% and 11% to Rmb0.54 and Rmb0.60. The stock is trading at 20x 2025e and 18x 2026e P/E. Considering the firm’s high-end business strategy can offer a valuation premium, we maintain our TP of Rmb14 (26x 2025e and 23x 2026e P/E), offering 30% upside.

Risks

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