WEIXING NEW BUILDING MATERIALS(002372)：2022 RESULTS IMPROVE DESPITE HEADWINDS;EXPECT STEADY GROWTH IN 2023

　　2022 results in line with our expectations
　　Weixing New Building Materials (Weixing) announced its 2022 results: Revenue rose 8.9% YoY to Rmb6.95bn, attributable net profit grew 6.1% YoY to Rmb1.30bn. In 4Q22, revenue rose 18.2% YoY to Rmb2.79bn, and attributable net profit grew 17% YoY to Rmb530mn, in line with our expectations.
　　PPR pipes posted positive growth despite headwinds:
　　1. Total sales volume of pipes rose 8.9% YoY in 2022 to 324,000t, with revenue from polypropylene random (PPR), polyethylene (PE) and polyvinyl chloride (PVC) pipes rising 6.4%, 3.7%, and 7.9% to Rmb3.3bn, Rmb1.8bn, and Rmb1.1bn. (Revenue from PPR pipes fell 5% in 1H22 and rose 14% in 2H22.) We attribute this mainly to the firm’s steady market expansion in core regions, with revenue in eastern and western China rising 8% and 13% YoY, while revenue in southern, central, northern, and northeastern China increased 6%, 7%, 1% and 5% YoY.
　　2. Impressive performance of emerging business segments: In 2022, revenue from other products (e.g. waterproof materials and water purifying materials) climbed 65% YoY to Rmb676mn, with YoY growth rates at 64% in 1H22 and 65% in 2H22. After acquiring Fast Flow (a drainage service company), Weixing’s revenue from overseas business soared 74% to Rmb277mn.
　　3. Raw material prices fell in 2H22; gross margin gradually recovered: Over 1-4Q22, gross margin was 36.6%, 38.5%, 43.3%, and 39.5%. We think that the decline in 4Q22 gross margin was partly due to promotional activities. In 2H22, gross margin of PPR, PE, and PVC pipes rose 0.3ppt, 7.3ppt, and 3.1ppt QoQ to 54.7%, 33%, and 16.4%, showing an overall recovery.
　　Expense ratio stable; net margin largely flat:
　　1. Selling, G&A and R&D expense ratios rose 1.4ppt, fell 1.3ppt and rose 0.2ppt YoY to 10.8%, 4%, and 2.7%: Selling expenses increased 25.5% YoY, mainly on an increase of around Rmb80mn in after-sales service fees. Weixing provisioned Rmb29.24mn for asset impairment losses in 2022 (mainly due to inventory impairment and goodwill impairment of Fast Flow). Overall, net margin edged down 0.5ppt YoY to 18.7%.
　　2. High earnings quality and high dividend payout ratio: In 2022, the firm's accounts receivable turnover rose by two days to 21 days, but the ratio of operating cash inflow to revenue remained high at 108%. Net cash inflow from operating activities reached Rmb1.53bn, implying a ratio of net operating cash flow to net profit at 117%. Total dividends in 2022 remained flat YoY, corresponding to a dividend yield of about 3%.
　　Trends to watch
　　Retail business to weather industry downturn; upbeat on growth of diverse product categories. In 2023, we expect property project completions to recover steadily, driven by government moves to ensure delivery of real estate projects. We also anticipate increasing demand for renovation of some existing homes after the impact of COVID-19 subsides.
　　We expect Weixing on-site “star butler” services (which help customers install pipes in their homes) to develop smoothly, boosting demand for pipes for home decoration. (Weixing expects revenue to rise 10% YoY to Rmb7.65bn in 2023.) We also remain upbeat on the firm's “concentric circle” multi-category strategy, which involves the sale of waterproof and water-purifying product through same channels. The firm is rolling out new product categories (e.g., waterproof and water purifying products) through retail channels in order to achieve high-quality and steady growth in the medium and long term.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 22x 2023e and 19x 2024e P/E. We maintain our OUTPERFORM rating and target price at Rmb31.10, implying 30x 2023e and 26x 2024e P/E, offering 35% upside.
　　Risks
　　Sharper-than-expected demand decline in the real estate sector; disappointing new business expansion.
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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。