ORIENTAL YUHONG WATERPROOF(002271)：DEMAND WEAK AND CORE PROFIT UNDER PRESSURE; STARTS PAYING LARGE DIVIDENDS

　　2024 results in line with market consensus
　　Oriental Yuhong Waterproof announced its 2024 results: Revenue fell 15% YoY to Rmb28.1bn; attributable net profit fell 95% YoY to about Rmb108mn; and recurring net profit fell 93% YoY to about Rmb124mn. In 4Q24, revenue fell 15% YoY to Rmb6.36bn, and net profit came to - Rmb1.17bn. The results were largely in line with market consensus.
　　1) Revenue under pressure; the civil construction segment maintains resilient growth. The firm's full-year revenue was under pressure in 2024. Specifically, revenue from waterproof membranes, coatings, sand powders, and construction fell 11%, 9%, 1%, and 51% YoY, with construction revenue affected by the firm's efforts to reduce direct sales channels.
　　By channel, revenue from the retail channel maintained resilient growth despite headwinds, rising 10% YoY to Rmb10.2bn (civil construction segment rose 15% YoY to Rmb9.37bn); the engineering channel rose 6.7% YoY to Rmb13.4bn, and the direct sales channel fell 59% YoY to Rmb4.3bn, as the firm strengthened control over centralized procurement by real estate developers and increased support for the engineering channel.
　　2) GM was under pressure in 2024 and fell markedly in 4Q24: Due to increased competitive pressure, GM fell 1.9ppt YoY to 25.8% in 2024 (excluding tax and surcharges), with GMs of waterproof membranes, coatings, and sand powder falling 4.2ppt, 2.3ppt, and 0.1ppt YoY to 23%, 35%, and 27%. GM fell 14.5ppt QoQ to 14% in 4Q24, possibly due to subsidies for distributors. By channel, the retail channel had the highest GM in full-year 2024, and its GM fell 2.3ppt YoY to 37%; the GM of engineering and direct-sale channels fell 2.4ppt and 8.9ppt YoY to 21% and 15%.
　　3) Expense ratios rose on falling revenue and falling economies of scale: The firm's selling, G&A, and R&D expense ratios rose 1.2ppt, 1.7ppt, and 0.3ppt YoY to 10.3%, 6.4%, and 2.1% in 2024.
　　4) Increasing aging of accounts receivable and rising impairments: Credit, asset impairment, and disposal gains and losses totaled Rmb1.27bn in 2024 (vs. Rmb1.0bn in 2023), as the rising proportion of long-aged accounts receivable, single provision, and impairment provision for home purchases among other non-current assets weighed on full-year profit.
　　5) Cash flow remained good: In 2024, the firm's receivables turnover days fell 4 days YoY to 108 days, cash-to-revenue ratio rose 4ppt YoY to 105%, and net operating cash flow rose Rmb1.4bn YoY to Rmb3.5bn.
　　6) Increased dividend: The firm plans to pay a cash dividend of Rmb1.85/sh (or Rmb4.4bn), implying a dividend yield of 14%.
　　7) The liability-to-asset ratio stood at 43% at end-2024, and the firm had net cash reserve.
　　Trends to watch
　　Civil construction advances steadily; overseas expansion starts. The firm's civil construction group increased efforts to expand distribution channels, creating synergies in selling new product categories (pipes and mortars). In 2024, it maintained double-digit growth despite headwinds. Meanwhile, the firm has increased efforts to expand its overseas presence. It is exploring the US, Malaysia, and the Middle East markets. We expect overseas businesses to create a third growth driver.
　　In 2025, we think demand in the waterproof material industry should remain under pressure, and the firm's profit will likely recover from 2024 thanks to channel transformation, internal cost reduction, efficiency improvement, and expense control.
　　Financials and valuation
　　As market demand is under pressure, we cut our forecast for net profit by 46% to Rmb1.3bn for 2025 and introduce a forecast of Rmb2.0bn for 2026. The stock is trading at 24x 2025e and 15x 2026e P/E. Given the firm's leadership, effective transformation, and recovering market sentiment, we maintain OUTPERFORM and keep our TP unchanged at Rmb16, implying 30x 2025e and 19x 2026e P/E, offering 26% upside.
　　Risks
　　Disappointing demand recovery; higher-than-expected impairment; slowing growth of the retail segment.
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