WEIXING NEW BUILDING MATERIALS(002372)：1Q23 REVENUE SLIGHTLY UNDER PRESSURE;INVESTMENT INCOME BOLSTERS PROFIT GROWTH

　　1Q23 revenue growth misses our expectation
　　Weixing New Building Materials announced its 1Q23 results: Revenue fell 11% YoY to Rmb896mn, and net profit attributable to shareholders rose 48% YoY to Rmb174mn. Revenue growth was slightly lower than expected due to sales promotions in 4Q22.
　　Revenue under pressure; investment income bolsters rapid earnings growth:
　　Revenue falls slightly: In 1Q23, revenue fell 11% YoY, down 29ppt QoQ compared with 4Q22, which we attribute to the company’s aggressive promotions in 4Q22, leading to front-loaded demand and shipments.
　　Gross margin under pressure QoQ: In 1Q23, ASP of PPR （a major raw material） fell 8% YoY and 1% QoQ to Rmb9,600/t, and prices of other materials PVC and PE remained largely flat QoQ. However, GM fell 2.3ppt QoQ to 37.2%, resulting in a 10% YoY decline in gross profit. We attribute this to a rising revenue contribution from construction projects in 1Q23.
　　Expense dilution effect weakens: In 1Q23, selling, G&A, and R&D expenses rose 9%, 3%, and 3% YoY, while expense ratio rose 2.9ppt YoY to 22.7% due to a slight decline in revenue.
　　Investment income surges: As the fair value of Ningbo Dongpeng Heli Equity Investment Company （a subsidiary of Weixing） rose sharply in 1Q23, mainly due to the rise of AI-related sectors. The fair value of Cambricon, a company in which Weixing owns a stake, increased strongly. Excluding the impact of investment income, we estimate that operating profit fell 21% YoY to Rmb128mn in 1Q23, implying a decline of operating profit margin by 1.9ppt YoY to 14.2%.
　　Net margin rises driven by investment income: Net margin rose 7.7ppt YoY to 19.4% due to rising investment income.
　　Business operation remains solid:
　　Modest cash outflow: In 1Q23, the cash-to-revenue ratio rose 12ppt YoY to 121%, but operating cash outflow was Rmb142mn （-Rmb71mn YoY） due to QoQ increases in inventory and advance payments by Rmb92mn and Rmb110mn, and a QoQ decline of salary payables by Rmb142mn.
　　Operations remain solid: The company remains in a net cash position.
　　Trends to watch
　　Impact of COVID-19 on door-to-door services easing; potential increase in end-market demand to gradually reduce channel inventory. Despite a slight decline in 1Q23 due to front-loaded demand and shipments, we expect new home decoration to gradually pick up following a steady recovery in GFA completed driven by efforts to ensure project delivery. In addition, after the impact of COVID-19 subsides, we expect demand for renovation of existing homes to gradually be unleashed. We expect Weixing’s on-site service business to develop smoothly, driving down inventories at distributors and retailers and boosting revenue growth over 2-4Q23.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 23x 2023e and 20x 2024e P/E. We keep our OUTPERFORM rating and target price unchanged at Rmb31.1, implying 30x 2023e and 26x 2024e P/E, offering 31% upside.
　　Risks
　　Sharper-than-expected decline in real estate demand; 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。