Guolian: Demand is expected to stabilize, focusing on the progress of quality transformation of decorating and building materials companies.

Guolian released a research report stating that looking ahead to the second half of the year, the continued release of signals of real estate easing may lead to positive changes in demand for decoration and building materials companies. At the same time, under the background of continuous strengthening of risk management such as overall receivables in the industry, there is a prospect of improvement in the balance sheet of enterprises. Some companies are strengthening product/customer structure adjustments for quality transformation, and companies with continuously strengthened competitiveness may have the opportunity to increase their market share. Combining the improvement in the fundamentals of enterprises and valuation, it is recommended to focus on two types of companies. First, companies that have a higher proportion of C-end or small B-end in their channel layout and are more "consumer-oriented" in the decoration and building materials sector. Key companies to focus on include Zhejiang Weixing New Building Materials (002372.SZ), Beijing New Building Materials Public (000786.SZ), Dehua TB New Decoration Material (002043.SZ), SKSHU Paint (603737.SH). Secondly, companies with a higher proportion of big B clients in the past, with positive adjustment effects in recent years and outstanding competitiveness in the decoration and building materials sector. Key companies to focus on include Beijing Oriental Yuhong Waterproof Technology (002271.SZ). Overall, there is significant pressure on the decline in scale and weak cash collection. Guolian selected 25 listed representative companies in the decoration and building materials sector as observation samples. In the first half of 2024, the operating income of the sample companies in the decoration and building materials sector was 73.1 billion yuan, a year-on-year decrease of 4%, with a median growth rate of -11%; net profit attributable to the parent company was 4.7 billion yuan, a year-on-year decrease of 24%, with a median growth rate of -38%. Overall, the sample decoration and building materials companies experienced significant pressure on revenue and profit in the first half of 2024, and profitability was under pressure. The accounts receivable turnover days for the sample companies in the first half of 2024 were 121 days, a decrease of 3 days year-on-year, with a median accounts receivable turnover days of 82 days, an increase of 5 days year-on-year. Consumer building materials companies overall maintained strict and cautious accounts receivable management, but overall turnover efficiency decreased compared to last year, and there is still significant pressure on cash collection in operating activities. Business scale: Growth under pressure, "consumer-oriented" companies more resilient In the first half of 2024, most of the sample companies experienced some pressure on revenue and net profit growth, reflecting the continued bottoming out of demand. Among them, Beijing New Building Materials Public, TIAN AN New Materials, and Wangli Security & Surveillance Product saw good growth in revenue and net profit, with year-on-year growth of 19%/17%, 2%/43%, and 15%/12%, respectively. Overall, under the backdrop of sluggish real estate sales, there is pressure on the growth in demand for decoration and building materials, and competition is fierce. Companies with a higher proportion of C-end or small B-end clients in the consumer-oriented sector show more resilience in revenue and profit growth. The profitability of most sample companies in the first half of 2024 was under pressure, and some companies (such as Keshun Waterproof Technologies, TIAN AN New Materials) saw improvements in profitability due to optimization of product structure and cost reduction. Business quality: Strict control of accounts receivable, turnover pressure continues year-on-year In terms of asset turnover, in the first half of 2024, most related companies continued to enhance dealer credit and customer credit sales policy requirements, overall control of accounts receivable was good, but affected by simultaneous decrease in revenue scale and other factors, the accounts receivable turnover days of sample companies in the first half of 2024 have been prolonged. The top 5 companies with the most shortened turnover days are Xiamen Wanli Stone Stock, Dehua TB New Decoration Material, Zhejiang Youpon Integrated Ceiling, SKSHU Paint, and Goody Science & Technology. In terms of cash collection, in the first half of 2024, most sample companies had weak cash collection in operating activities, the overall net cash ratio of sample companies decreased, with 18 companies having effective net cash ratios, among which 9 companies saw improvements year-on-year, while 5 companies decreased year-on-year; the overall net cash ratio of sample companies was -17%, a year-on-year decrease of 24%. Risk warning: Policy effects may fall short of expectations, real estate demand improvement may be weaker than expected, and raw material prices may fluctuate significantly.