Summary of Oriental Yuhong's 3Q25 Earnings Call Company Overview - **Company**: Oriental Yuhong (002271.SZ) - **Industry**: Construction Chemicals, specifically waterproofing materials Key Financial Results - **Net Profit (NP)**: Rmb245 million, down 27% year-over-year (yoy), and 30% below Goldman Sachs estimates (GSe) [1][7] - **Recurring Net Profit**: Excluding one-offs, recurring NP was Rmb262 million, flattish yoy [7] - **Top-line Revenue**: Rmb7.03 billion, up 9% yoy and 7% above GSe, marking the first positive growth since 3Q23 [1][3] - **Free Cash Flow (FCF)**: Increased by 14% yoy, reaching 2.5 times net profit [1] Profitability Metrics - **Gross Profit Margin (GPM)**: 24.8%, down 4.1 percentage points yoy and 2.2 percentage points below GSe [7] - **Operating Expenses**: Increased by 5% higher than expected, primarily due to a 23% rise in administrative expenses [7] - **Earnings Before Interest and Taxes Margin (EBITM)**: 4.6%, down 2.0 percentage points yoy and 1.7 percentage points below GSe [7] - **Net Profit Margin (NPM)**: 3.5%, down 1.7 percentage points yoy and 1.9 percentage points below GSe [7] Market Dynamics - **ASP Restoration**: The company noted an industry-wide average selling price (ASP) restoration in July, contributing to improved revenue growth [2][3] - **Volume Growth**: Better-than-expected volume growth was a key driver for the revenue beat [3] Management Insights - **Future Outlook**: Management is expected to discuss ASP and volume dynamics, reasons for soft GPM realization, and early comments on the 2026 outlook during the post-results conference call [9] Investment Thesis - **Market Position**: Oriental Yuhong is the largest producer of waterproofing materials in China, with a significant market share compared to competitors [13] - **Growth Potential**: The company is positioned to expand its market share due to cost competitiveness and robust channel capabilities [13][16] - **Long-term Strategy**: As the property market stabilizes, Yuhong aims to become a one-stop solution provider for construction chemicals [16] Risks - **Key Risks Identified**: 1. Weaker-than-expected construction activities 2. Unexpected increases in raw material prices 3. Risks associated with receivables from developer customers 4. Slower development of non-waterproofing businesses 5. Larger-than-expected impairment losses related to receivables [12][16] Valuation - **Price Target**: Rmb15.50, with a current price of Rmb13.27, indicating a potential upside of 16.8% [17] - **Valuation Metrics**: Target 2026E EV/GCI multiple of 1.3x, lower than the long-term average of 3.0x due to projected lower CROCI [11] Conclusion - **Recommendation**: Maintain a Buy rating on Oriental Yuhong, supported by its market leadership and potential for growth despite current challenges in the construction sector [2][16]