Summary of the Conference Call for SanKe Tree Company Overview - **Company**: SanKe Tree - **Industry**: Building Coatings Key Points Industry and Market Dynamics - SanKe Tree maintains operational resilience during the real estate downturn through strategic adjustments and channel transformations, effectively managing accounts receivable and bad debt risks, laying a foundation for future growth [2][3][6] - The building coatings market is expected to see significant growth driven by two main trends: substantial market share increase potential and rising repainting demand [2][7] - The retail market for building materials is currently the most important, with a total demand area of approximately 1.7 billion square meters from 2024 to 2026, while the incremental market faces pressure due to urbanization and real estate downturn [16] Company Performance - In the first half of 2025, SanKe Tree reported a slight revenue increase, outperforming many competitors who experienced revenue declines of over 10% [6][12] - The company anticipates a net profit of 380 to 460 million RMB for the first half of 2025, reflecting an increase of 81% to 119% year-on-year [12] Strategic Focus and Future Growth - The core logic for SanKe Tree's future development includes enhancing market share and increasing repainting demand, with current retail market share at less than 8% compared to Nippon Paint's 30% [4][7] - The company has introduced three new business transformation strategies, including accelerating the layout of stock renovation and offline channels, leveraging rural beautification subsidies, and creating a high-end product matrix with artistic paints [12][20] - SanKe Tree aims to achieve a profit of approximately 800 to 1,000 million RMB by 2025, with long-term goals to match Nippon Paint's revenue of over 20 billion RMB [11][30] Competitive Positioning - SanKe Tree has established a competitive advantage in the building coatings market, maintaining a strong market position alongside Nippon Paint [3] - The company has a comprehensive product system covering various segments, including imitation stone paint, latex paint, waterproof coatings, adhesives, and more, enhancing customer stickiness through a one-stop service model [23] Risk Management - The company has effectively managed accounts receivable risks, with a single-item impairment exposure of approximately 261 million RMB in 2024, representing 79% of its total [29] - The short-term outlook for the engineering coatings market remains weak, with an expected annual decline of 2.3% from 2024 to 2026, but SanKe Tree is shifting focus from large B direct sales to small B distribution channels to mitigate risks [28] Market Trends - The second-hand housing market is expected to remain robust, with a projected 60% share of transactions in 2024, driving demand for related products [17] - Home renovation is a strong demand driver, with retail sales of building materials showing positive month-on-month growth since 2025 [18][19] Conclusion - SanKe Tree is positioned for sustainable growth through strategic adjustments, effective risk management, and a focus on enhancing market share and product offerings in the building coatings industry [2][11][30]

Investment Rating - The report maintains a "Buy" rating for the company with a target price of RMB 53.19, based on a 40x PE for 2026 [1][6]. Core Views - The company is transitioning from incremental to stock demand in the domestic market, focusing on three new retail formats to enhance brand strength and drive sustainable revenue growth [1][14]. - The company is expected to see a profit margin inflection point and operational performance elasticity due to steady market share gains in the small B and C-end markets, alongside improved product and channel offerings [1][14]. Summary by Sections Retail Business - The company is targeting a total home decoration demand area of approximately 1.7 billion square meters from 2024 to 2026, with a compound annual growth rate (CAGR) of 5.0% for stock renovation demand, leading to a retail paint market exceeding RMB 60 billion annually [2][14]. - The company's retail market share is projected to reach about 7.9% in 2024, indicating significant room for growth compared to competitors [2][14]. Engineering Coatings - The company has shifted its channel strategy towards engineering distribution, with small B distribution revenue maintaining steady growth at a CAGR of 13.1% from 2020 to 2024, despite a decline in large B direct sales [3][16]. - The engineering coatings market is estimated to be around RMB 50-60 billion annually, with the company's market share expected to stabilize around 13% [3][16]. Market Positioning - The company is evolving from a single paint manufacturer to a comprehensive service provider, integrating paint, consulting, and construction services, which is expected to become a new growth driver [4][15]. - The company has established a solid position in the engineering market, with a stable market share and improved accounts receivable turnover, indicating a controlled risk environment [14][16]. Profit Forecast and Valuation - The company has adjusted its net profit forecasts for 2025-2027 to RMB 7.8 billion, RMB 9.8 billion, and RMB 12.1 billion, respectively, reflecting a CAGR of 54.0% [5][14]. - The target price of RMB 53.19 is based on a 40x PE for 2026, with the company expected to benefit from the rapid replication of new business formats and reduced impairment risks [5][14].

Investment Rating - The report maintains a "Buy" rating for the company, indicating an expected price increase of over 15% in the next 6-12 months [5][13]. Core Insights - The company is projected to achieve a net profit attributable to shareholders of 3.8-4.6 billion RMB in the first half of 2025, representing a year-on-year increase of 80.94%-119.04% [2]. - The company’s retail business continues to grow against the backdrop of a declining real estate market, with revenue growth rates for home decoration wall paint projected at 18.2%, 2.6%, and 12.8% from 2022 to 2024 [3]. - Gross margin is recovering, with a gross margin of 32.5% in Q4 2024, up 0.44 percentage points year-on-year, and 31.05% in Q1 2025, up 2.67 percentage points year-on-year [4]. - The company is expected to achieve net profits of 9.0 billion RMB and 12.5 billion RMB for 2025 and 2026, respectively, with corresponding P/E ratios of 31.0 and 22.3 [5]. Performance Summary - The company reported a historical high in total profit for the first half of 2025, with a net profit forecast midpoint of 4.2 billion RMB [2]. - The company has effectively reduced expenses through improved operational efficiency, with a 2024 expense ratio of 25.7%, down 0.5 percentage points year-on-year [4]. - The revenue forecast for the company shows a slight decline in 2024, followed by a recovery with growth rates of 8.00% and 12.49% in 2025 and 2026, respectively [10]. Financial Projections - The projected diluted earnings per share for 2025 is 1.221 RMB, with a significant increase in net profit growth rate expected at 171.32% [10]. - The return on equity (ROE) is expected to rise to 27.92% in 2025 and stabilize around 30.91% by 2027 [10]. Market Sentiment - The report indicates a favorable competitive landscape in the incremental market segments, with sustained demand despite the overall industry challenges [3]. - The company’s strategic focus on consumer-oriented growth and product structure optimization is expected to drive profitability and market share [4].