1H24 results miss our expectations

Asia Cuanon Technology (Shanghai) announced its 1H24 results: Revenue fell 30% YoY to Rmb1.04bn, and net profit attributable to shareholders turned negative to -Rmb19.13mn. In 2Q24, revenue fell 25% YoY to Rmb748mn and net profit rose 14% YoY to around Rmb62.60mn. The firm’s 1H24 results missed our expectations due to falling revenue and GM.

Revenue declined sharply as demand weakened and the firm adjusted its customer base. In 1H24, revenue from the coatings segment fell 41% YoY to Rmb610mn (vs. -52% and -36% YoY in 1Q24 and 2Q24), with total sales volume of coatings dropping 35% YoY to 210,000t in 1H24 (vs. -39% and -33% YoY in 1Q24 and 2Q24). Among other segments, revenue from energy-saving materials for buildings fell 14% YoY to Rmb253mn (vs. -26% and -7% YoY in 1Q24 and 2Q24), while revenue from the waterproofing segment rose 21% YoY to Rmb135mn (vs. +11% and +25% YoY in 1Q24 and 2Q24). Additionally, the revenue contribution from direct sales decreased by 6ppt YoY to 14.6% in 1H24.

Product prices were under pressure, leading to a decline in GM. Due to the falling prices of engineering coatings (ASP down 10% YoY in 1H24), the GM of the coatings segment fell 9.7ppt YoY to 31% in 1H24. Similarly, the GM of the insulation segment dropped 5.2ppt YoY to 12.4%, and that of the waterproofing segment declined 10.1ppt to -10%, mainly due to the conversion of waterproofing factories into fixed assets, low capacity utilization, and high fixed depreciation costs. The firm's overall blended GM fell 10.8ppt YoY to 23% in 1H24 (compared to -9ppt YoY to 24.4% in 2Q24).

Rapid expense reduction. The firm's expenses were reduced notably in 1H24, with selling, G&A, and R&D expenses falling by 26%, 9%, and 15% YoY. However, the expense ratio increased due to declining revenue, rising 5.1ppt YoY to 29.7% in 1H24. Additionally, the expense ratio rose by 1.4ppt YoY in 2Q24.

Write-back of credit impairment boosted profit margin. In 2Q24, the firm's credit impairment was a recovery of Rmb30.63mn (compared to a provision of Rmb74.92mn in 2Q23), which contributed to a 2.8ppt YoY increase in its 2Q24 net margin, reaching 8.4%. Excluding the impact of credit impairment, the firm's operating profit margin was 3.8% in 2Q24 (-10.7ppt YoY).

Cash flow weakened. In 1H24, operating cash flow turned negative, resulting in an outflow of Rmb217mn (compared to an inflow of Rmb68.59mn in 1H23). The cash-to-revenue ratio fell by 12ppt YoY to 87%.

High gearing ratio. The firm’s debt-to-asset ratio remained stable at 75% and net gearing ratio was 106% in 1H24.

Trends to watch

Industry demand under pressure; operating pressure increasing. Looking ahead, we believe the pressure on GFA completed will remain high, weighing on demand for coatings and insulation. We expect the firm to fine-tune its product mix and restore profitability by adjusting distribution channels and eliminating low-GM products.

Financials and valuation

Given falling revenue, we lower our 2024 net profit forecast by 72% to Rmb62.51mn and introduce our 2025 net profit forecast of Rmb64.76mn. The stock is trading at 45x 2024e and 44x 2025e P/E. Considering the firm’s status as an industry leader, we maintain OUTPERFORM rating and only cut our TP 31% to Rmb7.2, implying 49x 2024e and 48x 2025e P/E, and offering 9% upside.

Risks

Demand recovery disappoints; competition intensifies.