SKSHU PAINT(603737)：HIGH-QUALITY OPERATIONS CONTINUE;INCREASINGLY EXPLORING NEW BUSINESS SEGMENTS

　　3Q23 earnings in line with market expectations
　　Skshu Paint announced its 3Q23 earnings: Revenue rose 18.4% YoY to Rmb9.41bn and net profit attributable to shareholders rose 84% YoY to Rmb554mn over 1–3Q23. In 3Q23, revenue rose 13.4% YoY to Rmb3.67bn, its net profit grew 19% YoY to Rmb244mn, and recurring net profit rose 3.5% YoY to Rmb214mn, roughly in line with our and market expectations.
　　Inventories of home-decoration coating products declining; new product categories growing rapidly; retail sales revenue steadily
　　rising. Due to pressure on market-wide demand, the sales volume of home decoration coating products fell 3% YoY in 3Q23 amid destocking at distribution channels, while ASP of such products rose 2% YoY （down 1% QoQ）。 Thus, revenue from such products fell 1% YoY to Rmb0.74bn.
　　However, auxiliary material products and adhesive products maintained rapid growth （with sales volumes rising 88% and 34% YoY, and revenues growing 53% and 40% YoY）， thanks to expansion of distribution channels and product categories, and cost reduction.
　　Products used in diverse sectors; revenue from engineering coatings
　　business segment growing. Despite downward pressure on real estate- related businesses, Skshu continued expanding its market share in various new sectors where its products are used （e.g., municipal construction, education, healthcare, and factory sectors）， driving rapid growth in the engineering coatings business segment. In 3Q23, the sales volume of engineering coating products rose 21% YoY and revenue from such products grew 5% YoY. Waterproofing revenue also rose 24% YoY, while decoration and construction revenue fell 31% YoY.
　　GM stable QoQ. Purchase prices of most raw materials （e.g., emulsion and titanium dioxide） declined QoQ in 3Q23. However, GM remained flat QoQ （up 1.2ppt YoY） due to rising contribution from low-GM products.
　　Overall expense ratio rose 2ppt YoY to 21.5% in 3Q23. Skshu raised
　　subsidies for distribution channels and recruited sales staff for new businesses （e.g., art paint business）。 Thus, its selling expense ratio rose 1.3ppt YoY. The G&A and financial expense ratios rose 0.5ppt and 0.4ppt YoY due to lower revenue growth and a weaker dilution effect.
　　Cash flows remained strong. The firm’s ratio of cash received from sales of goods to revenue rose 0.5ppt YoY to 107.3% over 1-3Q23 （vs. 110% in 3Q23）， and the ratio between net operating cash flow and net profit was 107%.
　　Debt-to-asset ratio gradually declined. Net debt fell around Rmb0.39bn
　　QoQ in 3Q23 with debt-to-asset ratio falling to 80% and net gearing ratio declining 34ppt QoQ to 74%.
　　Trends to watch High-quality operations continue; increasingly exploring new
　　business segments. While maintaining steady and high revenue growth, cash flows and profit margins at Skshu are improving, and its debt ratio is falling rapidly. The firm has increased investment in sales staff and recruited new employees to invest in its art paint and countryside decoration business segments, which have significant growth potential but fragmented market landscape. We expect the firm to accelerate its expansion in these segments thanks to its strengths in distribution channels, services, and organization, which we think could contribute to the growth of its retail business segment.
　　Financials and valuation
　　Given slow demand recovery and falling product prices, we lower our
　　2023 and 2024 net profit forecasts 14% and 13% to Rmb0.78bn and
　　Rmb1.25bn. The stock is trading at 43x 2023e and 27x 2024e P/E. We maintain OUTPERFORM. Due to weak market sentiment, we cut our target price 20% to Rmb80 （implying 34x 2024e P/E）， offering 26% upside.
　　Risks
　　Intensifying competition; sharper-than-expected decline in demand from completed property projects.
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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。