3Q24 results in line with market expectations

Skshu Paint announced its 3Q24 results: In 1-3Q24, revenue fell 2.8% YoY to Rmb9.146bn; net profit attributable to shareholders fell 26% YoY to Rmb410mn. In 3Q24, revenue fell 7.9% YoY to Rmb3.385bn; net profit fell 18% YoY to Rmb200mn; recurring net profit dropped 20% YoY to Rmb170mn. 3Q24 results were largely in line with our and market expectations.

1) Revenue from coatings for home decoration continued to increase; revenue from coatings for engineering projects declined. As market demand was under pressure, the firm's sales volume of coatings for home decoration fell 3% YoY to 124,248t in 3Q24, while the ASP rose 7% YoY (+11% QoQ). Overall, revenue from coatings for home renovation rose 4% YoY to Rmb776mn. Revenue from base materials and adhesives came in at Rmb235mn (-2% YoY) and Rmb745mn (+1% YoY), due to falling demand. Sales volume of engineering coatings fell 5% YoY to 327,575t, and prices fell 11% YoY (-3.4% QoQ). As a result, revenue from engineering coatings fell 15% YoY to Rmb1.141bn. Revenue from waterproofing materials rose 7% YoY to Rmb356mn, with prices falling 7% YoY.

2) GM remained stable QoQ. In 3Q24, prices of most raw materials fell QoQ. Specifically, prices of coatings fell 11% QoQ and prices of base and auxiliary materials fell 8% QoQ. GM stayed flat QoQ at 28.7% (-3.1ppt YoY).

3) Expenses declined in 3Q24, while the period expense ratio rose. In 3Q24, selling and G&A expenses fell 6% and 3.5% YoY, and the selling and G&A expense ratios rose 0.3ppt and 0.2ppt YoY. Overall, the period expense ratio rose 0.4ppt YoY to 21.9%. Meanwhile, as credit impairment declined Rmb46mn YoY and asset impairment was written back by Rmb32mn, net margin fell only 0.7ppt YoY to 5.9% in 3Q24.

4) Cash flows remained healthy. In 1-3Q24, the cash-to-receivables ratio reached 104% (up 3ppt YoY to 113% in 3Q24); the net operating cash flow to net profit ratio reached 223%, as accounts receivable remained largely flat QoQ and accounts payable rose Rmb549mn QoQ in 3Q24.

5) Asset-liability ratio declined. Net debt fell about Rmb0.25bn QoQ in　　3Q24, with net gearing ratio declining to 63% (down 6ppt from end-2023).

Trends to watch

Retail sales grew steadily; cash flows improved. We note that in 3Q24, demand from completed property projects deteriorated. However, the firm maintained solid retail sales growth, thanks to rollout of high-end products and additional stores. We expect the firm's retail sales to remain resilient despite weak demand, and the retail business' revenue contribution to increase gradually thanks to its efforts to diversify product categories and add stores. Looking ahead, we believe although short-term impairment may continue to weigh on profit, the firm's cash flow will keep improving thanks to its retail transformation. We are upbeat on its cash flows in the long term, as capex and liability decline.

Financials and valuation

We keep our 2024 and 2025e net profit forecasts unchanged at Rmb519mn and Rmb784mn. The stock is trading at 43x 2024e and 29x 2025e P/E. We maintain an OUTPERFORM rating. We raise our target price 25% to Rmb50 to reflect improved risk appetite. Our TP implies 51x 2024e and 34x 2025e P/E, offering 18% upside.

Risks

Intensifying competition; sharper-than-expected decline in demand; rising raw material prices.