CITIC Securities: Real estate chain building materials C-end strategy is effective, price increases + competition optimization promote profit recovery.

Guotou Securities released a research report stating that the supply-side competition in the consumer building materials industry has been optimized, with some consumer building material categories seeing price increases due to cost drivers, and the industry's profit level is expected to recover. The loose tone of real estate demand-side policies continues, second-hand housing creates a C-side renewal period, regional infrastructure investment is growing rapidly, and overseas markets are opening up growth opportunities. High-quality leading consumer building materials companies have seen significant results in their retail channel layouts, with strong demands for price increases and stable profitability. The price wars in most categories may have ended, and overall sector profitability is expected to improve. Guotou Securities' main points are as follows: Real estate policies maintain a loose tone, second-hand housing transactions continue to pick up, and consumer building materials' existing demand continues to be released. Since 2025, the overall sales area of commercial housing has continued its downward trend, possibly benefiting from the impact of last September's new real estate policies. The sales area of commercial housing has seen a narrower decline compared to the previous year, with an estimated sales area of about 8.81 billion square meters in 2025, a year-on-year decline of 8.7%, narrowing by 4.2 percentage points compared to 2024. Starting from 2023, the transaction area of second-hand housing has shown a year-on-year growth trend, laying a foundation for maintaining stable national housing transaction volume. According to data from Kailu Research Institute, the transaction area of second-hand housing in the 30 key cities in 2023, 2024, and 2025 were 1.81, 2.13, and 2.14 billion square meters, with year-on-year growth rates of 33.0%, 17.3%, and 0.2% respectively. In 2026, the real estate industry will maintain a loose tone of relaxing purchase restrictions, with second-hand housing sales data still showing a warming trend in the first two months of the year. It is expected that the overall sales of new and second-hand housing in 2026 will remain stable, with consumer building materials demand likely to be more driven by renovation needs after second-hand housing transactions as well as renovation demands in the existing housing market. In 2026, overall fiscal policy will maintain a positive tone, and infrastructure investment is expected to maintain steady single-digit growth. Western infrastructure investment will remain strong, with significant growth rates in fixed asset investment in regions such as Xinjiang and Tibet exceeding the national average, continuing to stimulate regional building materials demand. Continuing to deepen the transformation of C-end channels, improvement in cash flow and profitability can be expected. Affected by the contraction of real estate demand, increased industry competition, and historical burdens of accounts receivable on the real estate side, consumer building materials operations have been under pressure since 2022, with a significant decline in revenue and performance. Leading consumer building materials companies have generally undergone channel transformations, shifting their strategic focus from large B-end engineering businesses to small B-end and C-end retail businesses to match the structural changes in the market, which are tilting towards second-hand and existing housing markets. The retail transformation of some high-quality enterprises has been effective, with the proportion of revenue from C-end and small B-end businesses increasing. In some years, revenue has grown against the trend, profitability has significantly improved, and growth rates have outperformed the overall sector. At the same time, C-end businesses usually have fast turnover and high gross profit margins. From a financial standpoint, there are expectations for improvements in operating cash flow and profitability indicators. Optimization of competitive landscape and price increases, gradual fading of impairment effects, and large elasticity in enterprise performance recovery in 2026. Under the backdrop of industry consolidation and credit risks, small enterprises are under pressure, leading to gradual exits from the industry, driving up the market share of leading companies in various consumer building material categories where price wars may have ended. Since 2025, national policies have repeatedly emphasized "anti-internal strife," coupled with the rise in prices of crude oil and chemical raw materials since early 2026, many consumer building material categories have released price increase notices, with the expectation that product price increases will effectively pass on cost pressures. Combined with the optimization of competition, product prices and profitability are expected to stabilize and rise. Starting in 2021, impacted by real estate credit risks, consumer building materials overall began to make large-scale provisions, severely dragging down performance. By 2025, the closing phase of real estate credit risks, 2026 will see a large elasticity in the recovery of enterprise performance of consumer building materials. Actively seeking new revenue growth points through overseas market deployment. Leading enterprises are setting sail overseas, with global distribution hedging against domestic cyclical impacts. To address the shrinking demand brought about by the downturn in the domestic real estate cycle, leading consumer building materials companies are taking internationalization as a core strategy, actively going global to expand new revenue growth points. From 2022 to the first half of 2025, overseas revenue growth rates and proportions have significantly increased. In the long run, focusing on the overseas market is a key strategy for building materials companies to navigate domestic cycles and seek new growth points. High-quality leading enterprises are transitioning from simple product exports to a deep sea model of brand, channel, and localization operations in order to build sustainable competitiveness in the global market and enhance revenue and performance. Risk factors: policy execution falls short of expectations, real estate data recovery is below expectations, infrastructure investment is below expectations, overseas deployment is below expectations, "anti-internal strife" policy implementation is below expectations, significant increase in raw material prices, and implementation of product price increases falls short of expectations.