3Q24 results miss our expectations Beijing New Building Materials (BNBM) announced its 1-3Q24results: Revenue rose 19% YoY to Rmb20.4bn and net profit attributable to shareholders grew 14% YoY to Rmb3.1bn. In 3Q24, revenue rose 20% YoY to Rmb6.8bn and net profit grew 8% YoY to Rmb931mn. 3Q24 results missed our expectations and market consensus due to the lower- than-expected GM of gypsum boards.

Revenue grew rapidly; GM fell QoQ, weighing on profit margin.

Sales volume of gypsum boards remained solid, but pricescame under pressure. We estimate that sales volume of gypsum boards remained largely flat in 3Q23, but the ASP of this product fell sharply due to weak demand and improved product mix for mid-range and low-end products. We estimate the ASP of gypsum boards fell 8% YoY and 11% QoQ. GM of this product stayed high at 38% (-4ppt QoQ and -2ppt YoY).

New businesses continued to grow. In 3Q24, revenue of thewaterproof material business rose 17% YoY to Rmb1.2bn and that of the coatings business came in at Rmb1.05bn. GMs of the waterproof material and coatings businesses were 17% and 31%.

Integrated GM was 30% in 4Q24 (down 2.7ppt QoQ, down 1.9ppt YoY), due to the declined GM of gypsum boards.

Expenses increased. In 3Q24, selling, G&A, financial, and R&D expenses rose 31%, 34%, 3%, and 12% YoY, pushing up the period expense ratio 0.6ppt YoY to 14.7% (+2.4ppt QoQ). Specifically, selling and G&A expense ratios rose 0.5ppt and 0.4ppt YoY.

Net margin fell 1.5ppt YoY to 13.8% in 3Q24 (-4.4ppt QoQ).

Operating quality remained sound; debt ratio was solid.

Cash flow remained solid. In 1-3Q24, the cash-to-revenue ratio fell 2.6ppt YoY to 86% (-4.5ppt YoY to 89% in 3Q24); net operating cash flow increased by 38% YoY to Rmb2.71bn, mainly due to increased cash flow from Carpoly. In 3Q24, accounts receivable turnover days increased by 2.6 days YoY to 55 days, accounts payable turnover　days remained largely flat YoY at 45 days, and inventory turnover days decreased by 13 days YoY to 52 days.

High-quality balance sheet: Debt-to-asset ratio fell 1ppt QoQ to 28% in 3Q24. The firm maintained net cash inflows.

Trends to watch The company continues to gain market share in gypsum boards; solid cash flows support growth of the waterproof material andcoatings businesses. We think product prices remain under pressure across the entire industry, due to weak demand and customers' control over decoration budgets. However, the company's sales volume of gypsum boards remains stable, as it continues to improve its marketing strategy, tap the potential of existing products, and improve its product portfolio.

The company keeps gaining market share. In addition, it generates ample cash flows from the gypsum board businesses. We think the company will continue to grow the competitiveness of its waterproof material and coatings businesses by leveraging its solid cash flows, resources of central SOEs, and refined management. We expect the company to gain market share in waterproof materials and coatings. The two businesses will likely become a second growth engine for the company, in our view.

Financials and valuation

We keep our 2024 and 2025 earnings forecasts. The stock is trading at 12x 2024e and 10x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb36. Our TP implies 14x 2024e and 12x 2025e P/E, offering 16% upside.

Risks

Sharper-than-expected decline in demand for gypsum boards; disappointing integration of the coatings business and/or growth of the waterproof material business.