BEIJING NEW BUILDING MATERIALS(000786)：EXPENSES WEIGH ON 3Q23 PROFIT; HIGH-QUALITY OPERATIONS SUPPORT GROWTH OF BUSINESSES

　　3Q23 earnings miss our expectation
　　Beijing New Building Materials announced its 1-3Q23 results: Revenue rose 10% YoY to Rmb17.05bn and net profit attributable to shareholders grew 17.3% YoY to Rmb2.756bn. In 3Q23, the firm’s revenue rose 14% YoY to Rmb5.648bn, and net profit rose 21.6% YoY to Rmb0.86bn, missing our and market expectations due to higher-than-expected expenses and non-operating expenditures.
　　Revenue grows steadily; high expenses and non-operating expenditures weigh on profit margin. Sales volume of gypsum board
　　products rose steadily with gross margin remaining stable. We estimate that the firm’s sales volume of gypsum board products grew 10% YoY in 3Q23 thanks to a low base last year (sales volume of gypsum board products fell 2% YoY in 1Q23 and rose 1% YoY in 2Q23; Taishan made a major incremental contribution in 3Q23). Meanwhile, the ASP of such products fell slightly due to the impact from structural changes in products.
　　However, we think gross margin of the firm's gypsum board products stayed high at nearly 40% (roughly flat QoQ) in 3Q23 thanks to falling costs of protective paper.
　　The firm’s overall gross margin was 32% in 3Q23, falling 0.5ppt QoQ and rising 2.8ppt YoY. The firm’s expenses rose markedly. In 3Q23, the firm’s selling expenses, G&A expenses, financial expenses, and R&D expenses rose 74% YoY, grew 10% YoY, fell 14% YoY, and rose 7% YoY, and its overall expense ratio rose 1.6ppt YoY to 9.5% (up 2.1ppt QoQ). In particular, the firm’s selling expense ratio rose 1.9ppt YoY and 2ppt QoQ.
　　In addition, the firm’s net margin fell 4.3ppt QoQ to 15.2% (up 0.9ppt YoY) due to increased non-operating expenditures of Rmb73.77mn in 3Q23.
　　High-quality operations; debt-to-asset ratio steady. The firm’s cash
　　flows remained solid with the cash-to-revenue ratio falling 3.4ppt YoY to 88.8% in 1-3Q23 (declining 2ppt YoY to 94% in 3Q23) and net operating cash flow growing by Rmb0.46bn YoY to Rmb1.961bn in 1-3Q23. In 3Q23, the firm’s receivables increased by Rmb2.54bn, payables rose by Rmb0.55bn, and inventories declined by Rmb0.2bn compared with the end of last year. With a high-quality balance sheet, the firm’s debt-to-asset ratio fell 0.3ppt QoQ to 23.9% in 3Q23, and the firm had net cash.
　　Trends to watch Lucrative profit of gypsum board products to support acceleration of business transformation; businesses to expand rapidly. Looking
　　ahead, we believe the firm's gypsum board business will continue to generate high-quality profit and cash flows thanks to its efforts to expand its presence in the home decoration service market, explore incremental markets and improve product value with one-stop services and differentiated products. Meanwhile, we think the firm's waterproof product business is on the road to accelerated revenue growth, falling costs, and high-quality operations thanks to its efforts to optimize production capacity and accelerate consolidation of distribution channels.
　　We expect the firm’s paint and coatings business to generate synergies and improve. The firm previously announced that it intends to acquire shares in Carpoly (a leading domestic paint and coatings company with annual revenue at Rmb4.5bn). If the acquisition is completed, thanks to its ample distribution channels and outlets in the gypsum board market, we think the firm could expand its presence in paint and coating products through various distribution channels (e.g., distributors and stores), rapidly expand its advantages in brands and distribution channels for paint and coating products, and gradually strengthen its paint and coating business.
　　Financials and valuation
　　Due to rising expenses, we cut our 2023 and 2024 net profit forecasts by 12% and 14% to Rmb3.7bn and Rmb4.2bn. The stock is trading at 11.5x 2023e and 10.1x 2024e P/E. We maintain OUTPERFORM rating and cut our target price by 11% to Rmb32, implying 14.5x 2023e and 12.9x 2024e P/E, offering 27% upside.
　　Risks
　　Weaker-than-expected demand from completed property projects; disappointing cost reduction and/or development of waterproof product business.
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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。