ORIENTAL YUHONG WATERPROOF(002271)：PRESSURE ON OPERATIONS SUSTAINED IN 1Q25; STRONG EXPENSE CUTS

1Q25 results miss our and market expectations
Oriental Yuhong Waterproof announced its 1Q25 results: Revenue fell 17% YoY to Rmb6bn and attributable net profit fell 45% YoY to Rmb192mn, missing our and market expectations, mainly due to lower- than-expected revenue and gross margin.
1) Revenue under pressure due to proactive contraction of centralized procurement business. As industry demand remained under pressure, the firm's revenue fell 17% YoY in 1Q25 (vs. the YoY growth of - 15% in 4Q24), which we attribute to the contraction of direct sales and centralized procurement business and a high base for civil construction in 1Q24.
2) Prices have been falling since 2023, weighing on blended gross margin. As price competition has continued since 2023 and product ASP has declined, the firm's gross margin (excluding tax and surcharges) fell 5.9ppt YoY to 23.7% (up 9.3ppt QoQ) in 1Q25.
3) Sharp decline in expense ratio. In 1Q25, the firm's overall expense ratio fell 3.4ppt YoY to 17%, with selling, G&A, and R&D expenses down 28%, 34%, and 22% YoY, mainly due to headcount reduction. Its operating profit margin fell 2.2ppt YoY to 4.7%, and net profit margin fell 1.6ppt YoY to 3.2% in 1Q25.
4) Cash-to-revenue ratio remained high, accounts receivable grew, and accounts payable decreased, resulting in net cash outflow. In 1Q25, the firm's cash-to-revenue ratio fell 10ppt YoY to 93%, but its net operating cash flow rose Rmb1.1bn YoY to -Rmb813mn. Specifically, accounts receivable increased Rmb1bn QoQ (accounts receivable turnover days fell 10 days YoY to 118 days), inventories dropped Rmb0.33bn QoQ, other receivables fell Rmb0.53bn QoQ, and accounts payable rose Rmb0.17bn QoQ.
5) Liability-to-asset ratio increased: In 1Q25, the firm's interest-bearing liabilities rose Rmb3.3bn QoQ to Rmb9.8bn (including about Rmb7.4bn cash on hand), and its liability-to-asset ratio rose 6.3ppt QoQ to 50%.
Trends to watch
Market competition remained; the firm accelerated the reform and started overseas expansion. In 2025, we believe demand in the waterproof industry will remain under pressure, and competition will remain fierce, weighing on product prices and gross margin in the industry. However, the firm is accelerating channel transformation (reducing revenue from direct sales and centralized procurement, and increasing the proportion of distribution and civil construction), and it has stepped up efforts to reduce costs, improve efficiency, and control expenses. At end- 2024, its headcounts fell 15% YoY. In addition, the firm has stepped up efforts to expand its presence overseas (it is expanding to the US, Malaysia, and the Middle East), which should create new growth drivers.
Financials and valuation
We largely keep our 2025 and 2026 net profit forecasts unchanged. The stock is trading at 20.9x 2025e and 13.5x 2026e P/E. We maintain an OUTPERFORM rating and our target price of Rmb16, implying 30x 2025e and 19x 2026e P/E and offering 43% upside.
Risks
Sharper-than-expected decline in demand; price competition; sharper- than-expected impairment; slower growth in the retail segment.
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