WEIXING NEW BUILDING MATERIALS(002372)：PREANNOUNCED 2023 RESULTS BEAT; RETAIL BUSINESS RESILIENT

　　Preannounced 2023 earnings beat expectationsWeixing New Building Materials preannounced its 2023 results, estimating that revenue fell 7.7% YoY to Rmb6.42bn; net profit attributable to shareholders rose 10% YoY to Rmb1.43bn; in 4Q23, revenue fell 4% YoY to Rmb2.68bn and attributable net profit grew 4.5% YoY to Rmb552mn, beating our and market expectations, mainly due to higher-than-expected revenue from the retail business in 4Q23.
　　Trends to watch 4Q23 revenue remained solid; retail business resilient. The firm'srevenue fell only 4% YoY in 4Q23, showing great resilience despite a large base of retail revenue due to the firm's promotions in 4Q22 (4Q22 revenue rose 18.2% YoY, much faster growth than the 3.4% YoY growth in 1- 3Q22), and pressured market demand. We estimate that: 1) Revenue from the retail business may have declined by only a low single-digit percentage YoY in 4Q23 (retail revenue fell about 5% YoY in 3Q23) thanks to its efforts to penetrate lower-tier markets and strengthen its market presence; 2) the acquisition of Zhejiang Kerui (which generated around Rmb150mn of revenue in 1H23) in September 2023 may have boosted the firm's revenue from the engineering segment in 4Q23; and 3) in 4Q23, the decline in engineering revenue narrowed thanks to a low base and marginal loosening of market liquidity conditions, and we estimate that the firm’s engineering revenue may have dropped only around 10% YoY in 4Q23.
　　Strong pricing power of retail business; earnings grew despiteheadwinds. In 4Q23, the firm preannounced its operating profit grew 4.3% YoY despite a large base (operating profit rose 16% YoY in 4Q22), underscoring the strong pricing power of the retail segment. We estimate that gross margin in 4Q23 may have increased by mid-single digits YoY due to falling raw material prices and improving economies of scale, similar to the increase in 3Q23. Despite market pressure and an 8% decline in the firm's 2023 revenue, the firm's full-year operating profit rose 10% YoY to Rmb1.69bn (or was roughly flat YoY, excluding investment income of about Rmb150mn in 2023).
　　Demand for home furnishing remains weak; strong competitive advantages and new product categories to support solid profit.
　　Demand for home furnishing remains under pressure due to weak　property sales and delayed completion of property projects (consumption of building and decoration materials fell 7.5% YoY in 2023, and dropped 7.8% YoY in December).
　　In 2024, we expect demand for home furnishing to remain weak as the pressure on demand from completed property projects may increase marginally compared with 2023. However, the firm has enhanced its profitability thanks to its services and high-quality brand image.
　　Meanwhile, the firm is expanding its product categories in the waterproof and water purification markets. We believe the firm will create a new growth driver by penetrating into lower-tier markets, expanding product categories and increasing average transaction value, and bolstering solid growth in revenue and profit. We estimate that the firm’s operating profit may remain stable YoY in 2024, or rise about 10% YoY excluding the impact of investment income in 2023.
　　Financials and valuation
　　Given higher-than-expected retail revenue in 4Q23, we raise our 2023 net profit forecast 4% to Rmb1.43bn. We maintain our 2024 revenue and profit forecasts, and introduce 2025 net profit forecast of Rmb1.56bn. The stock is trading at 16.7x 2024e and 15.4x 2025e P/E. Given the firm's solid earnings and strong pricing power, we maintain an OUTPERFORM rating and keep our target price unchanged at Rmb21, implying 23.1x 2024e and 21.4x 2025x P/E, offering 39% 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。