SKSHU PAINT(603737)：MAINTAINS STABLE GROWTH DESPITE HEADWINDS;COST CONTROL KEY TO EARNINGS IN 2H24

　　1H24 results miss our expectations
　　Skshu Paint announced its 1H24 results: Revenue rose 0.43% YoY to Rmb5.76bn; net profit attributable to shareholders fell 32% YoY to Rmb210mn, and recurring net profit dropped by 64% YoY to Rmb79.3mn. In 2Q24, revenue rose 0.3% YoY to Rmb3.69bn, attributable net profit fell 43% YoY to Rmb163mn, and recurring net profit dropped by 41% YoY to Rmb156mn. The company’s results in 1H24 missed our expectations due to the impacts of a YoY decline in GM and credit impairment.
　　Revenue remained solid; home decoration coating business grew despite headwinds: In 2Q24, sales volume of home renovation coatings, engineering coatings, adhesives, and auxiliary materials increased by 31%, 2.5%, 31%, and 26% YoY, but product prices declined YoY and QoQ due to weakening demand and fiercer market competition. Selling prices of home renovation coatings, engineering coatings, adhesives, and auxiliary materials fell 4%, 11%, 7%, and 20% YoY.
　　In 2Q24, revenue from home renovation coatings, engineering coatings, adhesives, and auxiliary materials came in at Rmb846mn (+26% YoY), Rmb1.3bn (-9% YoY), Rmb246mn (+21% YoY), and Rmb753mn (+1% YoY). Revenue from waterproofing increased by 22% YoY. Revenue from decoration engineering fell 51% YoY.
　　GM rose slightly QoQ, but declined YoY: In 2Q24, procurement prices declined QoQ for most raw materials, including titanium dioxide, additives, and monomers, albeit declining slightly compared to 2Q23. The company's GM fell 3.1ppt YoY to 28.8% (+0.4ppt QoQ) in 2Q24, due to fierce competition and falling product prices.
　　By product, GMs of home decoration and engineering coatings were 44% and 33% in 1H24, down 3.8ppt and 5.6ppt compared to the full-year GMs in 2023.
　　Period expense ratio remained stable: The period expense ratio edged up 0.6ppt YoY to 20.4% in 2Q24, due to inelasticity in expenses (R&D and advertising expenses continued to increase). The selling expense ratio increased by 0.5ppt YoY in 2Q24.
　　Operating cash flow was under moderate pressure: In 1H24, the cash- to-revenue ratio reached 99.3% (-6.5ppt YoY). Net operating cash outflow increased by Rmb237mn YoY to -Rmb41.7mn, with accounts receivable　(AR) up Rmb636mn from end-2023. AR turnover days dropped by 19 days YoY to 120 days. Accounts payable rose Rmb250mn compared to end- 2024.
　　The liability-to-asset ratio remained high: In 2Q24, net debt rose Rmb323mn QoQ. The liability-to-asset ratio stayed at 81%, on par with the level at end-2023. The net gearing ratio reached 97% in 2Q24, higher than the level in 1Q24, as the capex in 1H24 (around Rmb600mn) had an impact on cash and debt.
　　Trends to watch
　　Business operations remained solid despite headwinds and business structure continued to improve; cost control is key to earnings. The company's retail business maintained stable growth in 1H24 (+18% YoY) despite a notable decline in demand, thanks to its transformation to renovation and high-end products. We think its retail business will maintain stable growth going forward.
　　Looking ahead into 2H24, we think demand will likely remain weak, price competition may continue, and GM is likely to stay stable. Efforts to control expenses, improve income per employee, and reduce expense ratios hold the key to earnings, in our opinion.
　　Financials and valuation
　　We cut our net profit forecasts 32% to Rmb519mn for 2024 and 22.5% to Rmb783mn for 2025, given weak demand and lower product prices. The stock is trading at 35x 2024e and 23x 2025e P/E. We maintain an OUTPERFORM rating and cut our target price 32% to Rmb40. Our TP implies 41x 2024e and 27x 2025e P/E, offering 15% upside.
　　Risks
　　Intensifying competition; disappointing demand recovery; rising raw material prices.
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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。