The Zhitong Finance App learned that CITIC Securities released a research report saying that with the policy “to stop falling and stabilizing the real estate market” as the core goal, achieving this goal is significant for repairing the consumer building materials sector's valuation, and the profit level of the industry chain is also expected to return to average. Excellent leading companies have the ability and space to maintain steady growth in performance while greatly increasing dividend rates to return shareholders. The low point in the sector has passed, and the next upward trend is clear.

The main views of CITIC Securities are as follows:

Fundamental improvements driven by the return to average profit margins.

As the policy pushes the real estate industry to stop falling and stabilize, demand for real estate is expected to gradually stabilize after “overfalling”. The increase in the share of second-hand housing is conducive to stabilizing overall demand, while municipal infrastructure will gradually release shelved or incremental projects as the capital for chemical bonds is implemented. As overall demand on the B/C side improves, excellent leading companies have the space and ability to increase their market share and stabilize sales. In terms of profit margins, due to industry price wars, declining capacity utilization, and impairment factors, the profit margins of leading companies have all been low over the past ten years, but in the future, as competition in the industrial chain eases and the share of high-end products and cost control increases, etc., the profit margins of leading companies are expected to gradually return to the average value.

What cannot be overlooked is that leading companies are continuing to improve alpha capabilities.

Under the new model of policy promotion of real estate development, leading companies have switched to the C-side business one after another, and have continued to improve various aspects of business details in recent years. With sufficient production capacity in all areas, leading companies can make full use of resources to provide consumers with cost-effective products and services. Although it may seem difficult to greatly help fundamentals in the short term, they have gradually established the medium- to long-term development advantages of leading companies, and the quality of future operations is more important than the speed of operation. Calculating the net present ratio data of leading companies after restoration of depreciation, it can be seen that the cash flow quality of each company has improved markedly in the past two years, and the quality of operation has improved.

The steady recovery in real estate in mainland China is driving sector valuations back up.

Referring to the experience during the US financial crisis, US housing prices ended the period of greatest decline around March 2009. Housing prices continued to decline slightly from then until 2012/3, while US housing sales stabilized around the 3rd quarter of 2010. Corresponding to US consumer building materials companies, the stock price stopped falling and rebounding around March 2009. The low PE valuation was around 10x. Since then, the overall trend has fluctuated upward. The fundamentals stabilized around the fourth quarter of 2009, with a lag of 2 to 3 quarters. Since then, the compound performance growth rate of these consumer building materials companies has been around 5%, but with the support of dividends+repurchases, PE valuations have continued to rise to 25-30x. Looking back at A-share consumer building materials, PE valuations of leading companies are at historically low levels. Later, as the company's fundamentals improve and shareholder returns increase, sector valuations will also usher in a recovery in average value. Under the high-quality development trend of China's economy, a high profit growth rate is probably no longer a necessary condition for giving the company a high valuation; it should be the stability of the company's profits and the high certainty of shareholder returns.

Risk Factors:

Demand for housing construction and infrastructure is weak; raw material costs have risen sharply; consumer building materials companies' business market share has fallen short of expectations; diversified business development of consumer building materials companies has fallen short of expectations; and risk control of accounts receivable falls short of expectations.