The Zhitong Finance app learned that Huacheng Securities released a research report saying that the fundamentals of consumer building materials are climbing at the bottom, and while real estate is still being dragged down a lot, it has achieved continuous improvements in profit, cash flow, and rates. The long-term logic of the sector has not changed. In the post-real estate era,The “consumption attributes” of consumer building materials are gradually becoming apparent. Leading companies are expected to complete the transformation of business models and strengthen bargaining power while achieving continuous growth through channel changes and category expansion, thus achieving the branding and centralization of the industry. In the short term, focus on the recovery in real estate consumption and changes in the pace of demand brought about by new construction, completion, and second-hand housing transactions. In the medium to long term, it is recommended to focus on companies with perfect channels and category layouts or sub-industries where the pattern is still changing. Recommended attention: Dongfang Yuhong (002271.SZ), Mona Lisa (002918.SZ), etc.

▍ The main views of Huacheng Securities are as follows:

Q3 Revenue growth slowed, and earnings continued to recover

Consumer building materials achieved a total revenue of 87.831 billion dollars in the first three quarters of 2023, +7.57%, and net profit of 8.340 billion yuan, +47.68% year-on-year. Looking at the third quarter alone, the sector's revenue growth rate was 7.07%, and the performance growth rate was 33.45%. The revenue growth rate for the Q3 quarter in the same period last year still slowed slightly. This may be related to the decline in demand on the finished end (except for waterproofing, which is all on the back end), but sector profits are still being repaired continuously. Looking at the month-on-month comparison, the bottom of the construction chain is clear. Waterproofing is slightly faster than Q2 revenue, and demand for the completion chain has weakened.

Profitability continues to repair; costs, channels, prices may determine the extent of repair

In the first three quarters, the gross margin of the sector was 29.43%, +2.29pct year on year, up 0.35pct from 23H1, net profit margin was 9.63%, +2.68pct year on year, and 0.61 pct over 23H1. The decline in raw material prices contributed to a certain degree of performance elasticity. The average prices of national waste, natural gas, and PVC all fell by more than 20% year on year, and gypsum board, ceramic tiles, and PVC pipes benefited. The gross margin of the sector has clearly recovered. Apart from the fact that raw material costs have mostly declined year over year, the more important factor is that most companies are undergoing channel changes or customer structure adjustments.

If we only discuss the Big B market, in the current situation where demand is weak, it is difficult for the decline in raw material prices to be completely transmitted to the profit side, that is, cost reduction plus channel optimization, which together affects the extent and even direction of gross margin repair. Furthermore, the industry pattern is also an important variable. Construction coatings and sanitary ware with stronger C-side attributes do not reflect the resilience of consumer goods prices due to price war factors, so the pressure on terminal prices has caused a certain drag on corporate profits.

Operating cash flows were all positive over the same period

The net operating cash flow of consumer building materials in the first three quarters was +249 million, which was positive year over year and month over month. Looking at the whole year, the sector's cash flow is expected to improve for the first time after two consecutive years of deterioration. The revenue ratio for consumer building materials in the first three quarters was 0.99, +0.02 year on year, and the payout ratio was 1.02, year-on-year -0.03. Both upstream and downstream pressure were eased. When there was no significant change in relative bargaining power, there was a marginal improvement in sector cash flow, once again demonstrating the importance of channel transformation. In a horizontal comparison, due to downstream demand being on the B-end, cash flow pressure is relatively high, but there are still improvements over the previous year. Most of the other companies' cash flows were net inflows in the first three quarters.

Fees were mostly reduced during the period, and ceramic tiles achieved remarkable results in reducing costs and increasing efficiency

The sector rate for the first three quarters was 16.86%, -0.67pct year-on-year, mainly due to a decrease in management fees, -0.70pct to 7.61% year-on-year. By enterprise, the ceramic tile sector has achieved remarkable results in cost reduction and efficiency. Dongpeng and Mona period rates have been reduced by 6.3 pct and 1.5 pct, respectively. Mainly, management fees and sales rates have been drastically reduced. On the one hand, it is a base factor. In the same period last year, both ceramic tile companies' period rates were the highest in the same period in the past three years. On the other hand, demand pressure forced enterprises to reduce costs and increase efficiency.

In addition, the year-on-year increases were Yuhong, Keshun, and Weixing. Among them, Yuhong and Keshun were mainly due to an increase in channel construction expenses, while Weixing was mainly due to a decline in revenue and some expenses affected by the epidemic in the same period last year, with a low base.

Risk warning:

Real estate policies have been tightened beyond expectations, real estate sales have declined more than expected, and accounts receivable recovery risks are at risk.