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Skshu Paint announced its 1H23 results: Revenue rose 22% YoY to Rmb5.74bn. Attributable net profit surged 224% YoY to Rmb311mn. In 2Q23, revenue rose 22.4% YoY to Rmb3.68bn, and attributable net profit grew 111% YoY to Rmb284mn. The firm’s 1H23 results were in line with its preannouncement.
Revenue continues to grow rapidly despite headwinds. In 2Q23, sales volume of home decoration coatings, engineering coatings, and coating materials rose 22%, 33%, and 70% YoY, but product prices still fell YoY and QoQ due to falling raw material prices and intensifying competition.
Revenue from these three segments rose 8%, 18%, and 51% YoY. In 2Q23, revenue from adhesives, waterproofing, and decoration construction grew 26%, grew 46%, and fell 22% YoY, driving 2Q23 total revenue up 22% YoY.
GM continued to recover QoQ. In 2Q23, purchase prices of most raw materials （e.g., emulsions, pigments and fillers, resins, etc.） still declined QoQ, pushing GM up 0.7ppt QoQ to 31.9% （+3.2ppt YoY）。
Expense ratio fell 1.8ppt YoY to 19.9%, as selling expense ratio fell 2.0ppt YoY and G&A and financial expense ratios rose slightly.
Cash flow remained strong. In 1H23, the ratio of cash received from sales of goods to revenue reached 105.8% （down 6.9ppt YoY）， and net operating cash flow rose 25% YoY to Rmb194mn. Receivables increased Rmb461mn from end-2022, while accounts receivable turnover days decreased 10 days YoY to 141 days in 1H23. In addition, payables fell Rmb82mn from end-2022. The firm"s net debt remained largely flat QoQ, and the gearing ratio stayed at 81%. However, the net gearing ratio fell 27ppt QoQ to 107%.
Trends to watch
Demand for coatings remains resilient in both corporate and consumer markets. Since the beginning of the year, the demand for construction materials has not recovered as strongly as expected, but instead has weakened QoQ. However, we note that demand for coatings from property project completions has remained solid this year, driven by policies that ensure the delivery of property projects. In addition, we believe that there is robust replacement demand for coatings as the cost of paints is relatively low, driven by the need for industrial and commercial exterior wall replacements, as well as partial replacement of home furnishings
Looking ahead, we expect a gradual stabilization of the real estate industry and an increase in housing completions. The Politburo meeting1 has emphasized the need to address supply and demand conditions in the real estate sector, which further supports this expectation. In addition, the renovation of urban villages and urban residential communities may also drive demand for coatings. As a result, we are upbeat on the stabilization and recovery of coatings demand.
High operating quality; ample upside potential. We note that while maintaining high revenue growth, the firm"s cash flow and net margin continued to recover and improve, demonstrating its good business model. We see substantial earnings upside and potential economies of scale as GM recovers and expense ratio falls.
Financials and valuation
Given the slow demand recovery and falling product prices, we lower our 2023 and 2024 net profit forecasts 14% and 11% to Rmb903mn and Rmb1.44bn. The stock is trading at 46x 2023e and 29x 2024e P/E. We maintain OUTPERFORM rating and cut our target price （based on the ex- rights share price） 7% to Rmb100, implying 58x 2023e and 37x 2024e P/E, implying 27% upside.
Risks
Intensifying competition; disappointing demand recovery.
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【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。
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