Huafu Securities: Building materials production capacity cycle is expected to reach a turning point, and the overall sector is showing signs of recovery.

Huafu Securities released a research report stating that under the expectation of accelerating supply-side structural reforms in opposition to the inner-distribution spiral, the building materials production capacity cycle is expected to reach a turning point. Looking ahead, the downward trend in interest rates is expected to benefit the restoration of home buying intentions, and property storage and urban reform efforts will help restore home purchasing power. The expectation of marginal restoration of home buying intentions and capabilities is expected to increase the probability of stabilizing the fundamentals of the real estate market and may also drive the recovery of demand in the real estate sector. Compared to 2024, the deterioration of the fundamentals of the building materials sector this round is not significant, and the valuation percentile is lower than the low point at that time, suggesting that both the fundamentals and valuation of the sector are expected to further recover. The main viewpoints of Huafu Securities are as follows: The overall improvement of the building materials sector, bottoming out of profitability In the first half of 2025, the total operating income of listed companies in the building materials sector was 305.53 billion yuan, a year-on-year decrease of 4.9%, with a growth rate of +8.14% compared to the same period last year. Net profit attributable to shareholders was 11.80 billion yuan, a year-on-year increase of 43.7%, with a growth rate of +104.80% compared to the same period last year. The growth rate of the performance of the building materials sector in the first half of 2025 was 48.57% higher than the growth rate of revenue, mainly due to the bottoming out and rebound of prices, with profits recovering more significantly than revenue. Recovery in the cement industry is due to price increases at the bottom, downstream demand has not yet improved. In the first half of 2022, due to the impact of the bottoming out of downstream real estate and the slowdown in infrastructure construction, the cement industry lagged behind the same period last year, with the sector achieving operating income of 179.60 billion yuan, a decrease of 5.4% compared to the same period last year. However, at the same time, cement prices have recovered to some extent, coupled with a significant decrease in coal costs, the overall profitability of the industry has significantly improved, with the sector achieving a net profit attributable to shareholders of 4.29 billion yuan, an increase of 903.8% year-on-year. The glass industry's business climate is not good, and the demand for fiberglass sectors is picking up. In the first half of 2025, glass manufacturing companies continued to be under pressure, while fiberglass manufacturing companies saw significant improvements in revenue and performance. In the first half of 2025, the glass manufacturing sector achieved operating income of 22.06 billion yuan, a decrease of 18.1% year-on-year, and achieved a net profit attributable to shareholders of 530 million yuan, a decrease of 72.7% year-on-year. The sharp decline in performance was due to the continuous decline in glass prices caused by a mismatch between supply and demand. The fiberglass manufacturing sector achieved operating income of 31.10 billion yuan, an increase of 20.9% year-on-year, and achieved a net profit of 3.29 billion yuan, an increase of 127.0% year-on-year, mainly benefiting from structural improvements in downstream demand, recovery in fiberglass prices, and a significant increase in profitability. Leading consumer building materials companies are the first to move out of the bottom, while small and medium-sized enterprises are generally under pressure. In the first half of 2025, 37 decoration and building materials companies achieved operating income of 72.76 billion yuan, a decrease of 7.7% year-on-year, accounting for 23.8% of the building materials sector. Net profit attributable to shareholders was 3.70 billion yuan, a decrease of 31.1% year-on-year, mainly due to the drag on the sector from pipe materials and waterproof materials, with good profitability for paint companies. In the consumer building materials sector, leading paint company SKSHU Paint and leading board company Dehua TB New Decoration Material saw improved performance, achieving net profits of 440 million yuan and 270 million yuan respectively, with year-on-year growth of 107.5% and 9.7%. Investment Recommendations With the expectation of accelerating supply-side structural reforms in opposition to the inner-distribution spiral, the building materials production capacity cycle is expected to reach a turning point, and looking ahead, the downward trend in interest rates is expected to benefit the restoration of home buying intentions. Both property storage and urban reform efforts will help restore home purchasing power, and the expected marginal restoration of home buying intentions and capabilities is expected to drive an increase in the probability of stabilizing the fundamentals of the real estate market and may also drive the recovery of demand in the real estate sector. Compared to 2024, the deterioration of the fundamentals of the building materials sector this round is not significant (the volume and price of property sales are at a lower level, and top companies rely less on large B channels), and the valuation percentile is also lower than the low point at that time. The sector is judged to have the potential for further recovery in both fundamentals and valuation. In terms of investment targets, it is recommended to focus on three main themes: 1) high-quality blue-chip targets with excellent industry structure and benefiting from stock renovation, such as Zhejiang Weixing New Building Materials, Beijing New Building Materials Public, and Dehua TB New Decoration Material; 2) oversold targets that benefit from the alleviation of credit risks at the B end and still have long-term growth potential, such as SKSHU Paint, Beijing Oriental Yuhong Waterproof Technology, and Guangdong KinLong Hardware Products; 3) leading cyclical building materials companies that have bottomed out in fundamentals: It is recommended to focus on Huaxin Cement, Anhui Conch Cement, China Jushi Co., Ltd, Zhuzhou Kibing Group, etc. Risk Warnings Macroeconomic conditions fall short of expectations; New orders fall short of expectations; Collection of payments falls short of expectations; Implementation of industry anti-inner-distribution policies falls short of expectations.