WEIXING NEW BUILDING MATERIALS(002372)：STEADY GROWTH IN RETAIL SALES; 1Q24 RESULTS BEAT EXPECTATIONS-格隆汇

机构：中金公司
研究员：Qing GONG/Maoda YANG/Yan CHEN

　　1Q24 results beat our expectations
　　Weixing New Building Materials announced its 1Q24 results: Revenue rose 11% YoY to Rmb997mn; net profit attributable to shareholders fell 11.6% YoY to Rmb154mn; and recurring net profit rose 37.6% QoQ to Rmb142mn, beating our and market expectations, mainly due to higher- than-expected retail revenue growth.
　　Steady revenue growth: In 1Q24, revenue rose 11% YoY, up 17ppt QoQ compared with 4Q23, mainly due to the low base of retail sales in 1Q23 caused by the firm's marketing activities in 4Q22. We estimate that the firm's retail business revenue grew nearly 10%, and its engineering business revenue rose more than 10% (excluding the impact of acquired Kerui and Hexin, engineering business revenue likely declined in 1Q24 ).
　　Gross margin expansion: The firm's blended gross margin rose 4.3ppt YoY to 41.5% in 1Q24 due to YoY declines in prices of major raw materials such as PPR/PVC and a higher proportion of retail sales, resulting in a 24% YoY increase in gross profit.
　　Increased expenses and rising expense ratio: The firm continued to increase selling expense (+21% YoY in 1Q24), while G&A and R&D expenses rose 8% and 6% YoY, driving up overall expense ratio 1.2ppt YoY to 24% (with selling expense ratio +1.2ppt).
　　Lower investment income: Investment return in 1Q24 dropped Rmb67.04mn, mainly because a surge in fair value of subsidiary Ningbo Dongpeng Heli Equity Investment in 1Q23 led to a high base. Excluding the impact of investment income, we estimate that operating profit rose 4ppt YoY to 18% in 1Q24 (implying operating profit +43% YoY).
　　Recurring net margin up: Net margin fell 4ppt YoY to 15.4% due to falling investment income, but recurring net margin rose 2.7ppt YoY to 14.2%.
　　Slight cash outflow: In 1Q24, the firm’s cash-to-revenue ratio fell 3.4ppt YoY to 118%, but operating cash outflow reached Rmb176mn (-Rmb34mn YoY) as inventories and payables changed by +Rmb81mn and -Rmb80mn QoQ in 1Q24.
　　Business operations solid: The firm maintained net cash, with a debt-to- asset ratio of only 18%.
　　Trends to watch
　　Decoration demand recovering; the firm’s expansion of retail channels. We note that GFA completed, according to the National Bureau of Statistics (NBS), fell 20% YoY in 1Q24, but retail sales of construction and decoration products rose 2.4% YoY. This suggests that demand for home decoration may gradually recover, driving stable retail sales.
　　Looking ahead into 2024, we believe the firm may expand gain market share by leveraging its solid service capabilities, strong channels, and high profitability. Meanwhile, the firm seeks to expand into waterproofing and water purification sectors and lower-tier markets, explore new product categories, and increase transaction per customer, in order to boost steady growth.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 18.7x 2024e and 17.3x 2025e P/E. We maintain OUTPERFORM and target price of Rmb21, implying 23x 2024e and 21x 2025x P/E, offering 24% upside.
　　Risks
　　Sharper-than-expected decline in real estate demand; disappointing new business expansion.