WEIXING NEW BUILDING MATERIALS(002372)：RETAIL SALES UNDER SLIGHT PRESSURE; EXPENSES AND BUSINESS IMPAIRMENT WEIGH ON EARNINGS

　　Preannounced 2024 results slightly miss our expectations

    　　Weixing New Building Materials (Weixing NBM) preannounced its 2024 results, estimating that in 2024, revenue fell 1.68% YoY to Rmb6.27bn and net profit attributable to shareholders dropped 33% YoY to Rmb955mn; in 4Q24, revenue fell 5% YoY to Rmb2.5bn and attributable net profit dropped 41% YoY to Rmb330mn. The preannounced results slightly miss our expectations, mainly due to impairment losses and expenses.

    　　Trends to watch

    　　Retail sales remained under pressure in 4Q24; gross margin was under pressure; expenses rose; impairment hurt profit. We estimate that revenue from the retail business declined by mid-to-high single digits YoY in 4Q24 (similar to 3Q24), and full-year revenue from the retail business fell by about 5% (excluding new businesses such as Kerui and Fast Flow), while the engineering business continued to drag 4Q24 revenue. We estimate 4Q24 gross margin at around 40%, down slightly QoQ. In terms of expenses, the firm's selling expense ratio rose YoY due to increased spending on services and advertising in 2024 and the consolidation of Kerui’s financial statements. Meanwhile, Kerui and Fast Flow continued to suffer losses due to intensifying competition, and Weixing NBM made provisions for goodwill impairment, which also weighed on profit.

    　　Demand for home decoration remains weak; strong competitive advantages and new categories to support the stabilization of profit. We expect demand from new home decoration to remain under pressure in 2025 due to the continued downtrend in new home sales and housing completions. Demand for pipes for home decoration may be weak, and fierce price competition in the market may disrupt the firm's high-gross- margin model. However, the firm is strengthening its competitive advantages by increasing expenses (e.g., improving service quality and brand image). It is also accelerating the exploration of new businesses in waterproofing and water purification to promote sales at distributors. We expect the firm to increase its presence in lower-tier markets, product categories per store, and per-customer sales to bolster its revenue, and we expect it to maintain solid profits despite a weak operating environment.

    　　High-quality business model with high dividend payout; we believe the firm offers long-term investment value. In the near term, the firm is increasing expenses to become a service provider with more comprehensive services. Meanwhile, the impairment losses of Kerui and Fast Flow may cause disruptions to earnings. In the long term, however, we believe the firm will be able to capture more high-end demand and maintain solid core profit thanks to its transformation towards high-quality services. We estimate a 2024 dividend yield of 4.6% if the payout ratio remains unchanged, implying long-term investment value.

    　　Financials and valuation

    　　Given the pressure on property project completions, we lower our 2024 and 2025 net profit forecasts 9% and 12% to Rmb955mn and Rmb964mn, and introduce our 2026 earnings forecast of Rmb1.07bn. The stock is trading at 19x 2025e and 17x 2026e P/E. Considering that the firm is an industry leader, we maintain an OUTPERFORM rating, but cut our TP 15% to Rmb14 (23x 2025e and 21x 2026e P/E), offering 21% upside.

    　　Risks

    　　Sharper-than-expected decline in demand from completed property projects; disappointing new business expansion.