3Q24 results miss market expectations

Weixing New Building Materials (Weixing NBM) announced its 3Q24 results. In 1-3Q24, revenue rose 0.7% YoY to Rmb3.77bn, and attributable net profit fell 29% YoY to Rmb624mn. In 3Q24, revenue fell 5% YoY to Rmb1.43bn, and attributable net profit fell 25% YoY to about Rmb284mn, in line with our expectations but missing market expectations due to lower-than-expected gross margin.

Revenue under pressure; gross margin dropped due to a high base.

1) Retail and engineering segments both under pressure: We estimate that revenue from the retail segment fell around 10% YoY in 3Q24 and revenue from the construction and municipal engineering projects fell around 15% YoY. The decline narrowed to -5% in 3Q24 if considering acquisitions.

2) YoY decline in gross margin: In 3Q24, prices of major raw materials remained largely stable QoQ. We estimate that gross margin of PPR/PE products remained largely stable YoY, but gross margin of PVC products declined more than 10% due to a high base last year. The firm’s blended gross margin fell 4.9ppt YoY and rose 0.5ppt QoQ to 43% in 3Q24.

3) Continued investment in channels and higher expenses: As the firm is increasing investment in channels (e.g., establishing new water purification channels, opening specialty stores, and introducing celebrity endorsements), its selling expenses rose 21% YoY to Rmb555mn in 1- 3Q24 (including the impact of M&A). Period expense ratio rose 2.6ppt YoY to 20% in 3Q24. Specifically, selling, G&A, and R&D expense ratios changed 2, 0.2, and -0.1ppt YoY.

4) Profit margin under pressure due to a high base: As gross margin and net margin reached 48% and 25% in 3Q23, the firm’s profit from operations fell 27% YoY in 3Q24 despite revenue pressure, rising expenses, and falling gross margin. The firm’s net margin fell 5.3ppt YoY and grew 6ppt QoQ to 19.9% in 3Q24.

High operating quality: The firm’s cash flow remained strong. In 1-3Q24, the firm's net operating cash flow rose 1% YoY to Rmb812mn, with the cash-to-revenue ratio falling 1.4ppt YoY to 111%. The ratio in 3Q21 was　106%, up 5ppt YoY. The firm reported net cash in 3Q24, with liability-to- asset ratio standing at 24%.

Trends to watch

Demand pressure emerged; core products maintain high gross margin. Demand and prices of pipes for home decoration are under pressure due to falling housing completions and households' reduced willingness to renovate homes. However, the firm maintained solid retail sales and the gross margin of its core product PPR remained stable thanks to its optimized services and product mix. This lays a solid foundation for the firm’s earnings. Looking ahead, we believe the pressure on GFA completions may continue, and that the firm will likely maintain solid revenue and gross margin by increasing marketing expenses, optimizing services, and diversifying product categories.

Financials and valuation

Given rising demand pressure, we cut our 2024 and 2025 net profit forecasts 18% and 16% to Rmb1.05bn and Rmb1.1bn, and the stock is trading at 23x and 22x 2024e and 2025e P/E. Considering the firm is an industry leader and the market's risk appetite is rising, we maintain an OUTPERFORM rating and our TP of Rmb16.5, implying 25x and 24x 2024e and 2025e P/E, offering 10% upside.

Risks

Demand from the real estate industry weakens more sharply than expected; expansion of new businesses disappoints; price competition intensifies.