(Report Producer: Shenwan Hongyuan Research)
1. Building materials: basic materials that run through the front and back of the real estate chain
1.1 Building materials: many categories are large-scale, anchoring the fluctuations of the real estate cycle
There are many categories in the building materials industry, and the demand comes from real estate, infrastructure, rural areas, etc. Building materials in the narrow sense mainly include cement, glass, concrete, superplasticizer, waterproof materials, ceramic tiles, coatings, thermal insulation materials, pipes, gypsum boards, wood-based panels, etc. used in building construction, used to form the structure or surface of the building materials. The products of the building materials industry are usually relatively stable, the industrial chain is relatively short, the upstream is the supply of raw materials, and the downstream usually includes real estate construction, infrastructure, rural self-built houses, and the renovation of stock buildings. The overall demand of the building materials industry is highly correlated with the new start, construction, sales, completion, investment and other data of the real estate; Infrastructure, municipal investment and rural fixed asset investment also have a strong impact on the demand for building materials.
The market size of the building materials industry is large, with a rough calculation of more than one trillion yuan. According to the data of the Bureau of Statistics and various industry associations, we roughly calculated, even after experiencing the downturn of real estate, the national building materials industry market exceeded one trillion. The Bureau of Statistics disclosed that in 2023, the annual output of the cement industry will be 2.02 billion tons, and the output of flat glass will be 970 million weight boxes; China Building and Sanitary Ceramics Association disclosed that the output of ceramic tiles in 2023 will be 6.37 billion square meters; The China Plastic Pipe Industry Association disclosed that the output of plastic pipes in 2023 will be 16.19 million tons, and the China Building Materials Industry Federation will disclose that the output of gypsum board in 2023 will be 3.21 billion square meters; The China Forest Products Industry Association disclosed that the output of wood-based panels in 2021 was 337 million cubic meters, and we estimate that the output in 2023 will be about 300 million cubic meters; According to the disclosure of China Coatings magazine, the output of architectural coatings in China in 2023 will be 9.64 million tons; According to the China Building Waterproof Industry Association, the waterproof output in 2023 is estimated to be 3.1 billion square meters, and the China Sand and Gravel Association disclosed that the aggregate output in 2023 will be 16.8 billion tons. Combined with the sales unit price of various products, we estimate that the market size of the country's main building materials products is about 3.09 trillion yuan (excluding Kiev materials, concrete, water reducers, etc.).
According to the classification of building materials product attributes, the building materials industry can be divided into cycle building materials and consumer building materials. Cement and glass are relatively homogeneous, basically in the stage of complete competition, and the cyclical nature is strong, so we classify it as a periodic building material; It is worth mentioning that water reducers, concrete, aggregates, etc. are generally classified as cement industry chains. Waterproofing, coatings, pipes, tiles, plates, hardware and other categories involve consumer attributes and functional attributes, homogeneity is relatively weak, different brands can differentiate competition to form brand advantages, we classify it as consumer building materials. The construction of housing construction engineering can be mainly divided into housing construction civil construction engineering and indoor and outdoor decoration engineering, that is, two construction stages of civil engineering and decoration of simple classification. Generally, we call the construction related to the civil construction stage of real estate as the early cycle of real estate, and the typical early cycle building materials are cement and cement industry chain related materials; The stage of real estate decoration is called the post-cycle, and the typical post-cycle building materials generally include indoor tiles, coatings, PPR water pipes, wood-based panels, doors and windows hardware, etc., and the generalized post-cycle also includes soft furnishings, curtains, carpets, paintings, etc., and the glass, exterior wall coatings, thermal insulation, etc., which are used at the end of the civil construction stage, are usually also classified to the post-cycle. Materials such as PVC sewer pipes and foundation waterproofing are usually between the early cycle and the late cycle.
Cyclical building materials are cyclical building materials, product homogeneity, full competition, and a supply and demand analysis framework that conforms to the cycle. The key to the analysis of cyclical building materials is to grasp the supply, demand and cost. The main factors affecting supply include enterprise production capacity, government production restrictions, manufacturers' inventories, etc.; The demand for building materials mainly comes from infrastructure, real estate, and rural demand; Due to the small product difference of cycle building materials, cost and scale have become the core source of competitive differences.
The demand for cement and the growth rate of new real estate construction area are highly synchronized. The cement industry has five characteristics: periodical, regional, seasonal, flexible start and stop, and not easy to store. The downstream demand of the cement industry lacks accurate specific distribution, and it is generally believed that it is composed of real estate, infrastructure, and rural construction, which is generally maintained at about one-third of each, and the proportion of real estate demand in developed areas such as East China and coastal areas is higher, and in recent years, with the decline in real estate, the proportion of infrastructure has increased. At present, it is difficult for the cement industry to put new production and exit production capacity. Capacity replacement restricts the new cement production capacity, staggered production inhibits the play of production capacity, limits output, and the fluctuation of supply has smoothed out, but also slows down the process of clearing backward production capacity. Cement is a typical building material at the start end, and from the perspective of historical data, cement prices lag behind the growth rate of real estate sales for about 1 year, and the growth rate of new construction area is more synchronized.
The price of glass is about three months ahead of the completion of real estate. According to the classification of production line types, glass is mainly divided into flat glass and optical rolled glass, flat glass is in the upstream of the industrial chain, and deep processing glass is downstream of flat glass. Glass in a broad sense also includes automotive glass, photovoltaic glass, electronic glass, pharmaceutical glass, daily glass, etc., we only discuss the application of architectural flat glass in the post-real estate cycle. Short-term glass price fluctuations are highly negatively correlated with inventory levels, with inventory being the main reason for determining short-term prices. On a longer-term scale, the demand of the glass industry is mainly driven by real estate demand, and the price of glass is roughly similar to the trend of real estate completion, and glass is generally about 3 months ahead of real estate completion.
Consumer building materials: consumer building materials and cycle building materials are quite different, consumer building materials have brand attributes, products have certain differences, enterprises need to grasp the channel layout, etc., usually have both consumer attributes and engineering attributes. Consumer building materials are usually the building materials required for the post-cycle decoration of real estate, such as ceramic tiles, coatings, plates, plastic pipes, hardware, waterproofing, etc. The promotion of hardcover houses has enabled the rapid development of large B-end building materials from 2016 to 2022; The self-decoration and renovation needs of the rough house are usually carried out by the small B or C-end channels, so the consumer building materials naturally have engineering + consumption attributes from the channel.
The long slope and thick snow of consumer building materials are a good track for producing cattle stocks. In the past ten years, consumer building materials have produced many long-term bull stocks. The production process of consumer building materials is mature (small space for cost reduction), the brand + channel model is fixed (good companies have growth), the industry is large and scattered (with room for concentration improvement), and it has the conditions to breed good companies.
1.2 New houses are down, but the building materials industry is still broad
New houses are down, but the proportion of second-hand housing transactions has increased or smoothed the cycle. In 2021, the tightening of real estate financing and the unstable expectations of residents' income will be affected by factors such as new real estate starts and sales, which will put pressure on the building materials industry. However, people's demand for improving the living environment has never stopped, and the demand for redecoration has great potential. The demand for building materials accompanies the various stages of urbanization development: the demand for building materials in the high-speed development stage grows rapidly, and the stock renovation demand in the stable stage with a high urbanization rate can be expected for a long time. The renovation has benefited more than 100 million residents, which is expected to stimulate the demand for renovation. The renovation of old urban communities, that is, the renovation of old urban communities, is a major measure taken by the mainland to meet the needs of the people for a better life and promote urban renewal, and the main goal of the renovation is to build old urban communities that need to be renovated by the end of 2000. In 2015, the Central Work Conference first proposed the renovation of old residential areas, in 2019, the State Council issued a notice to promote the old reform, in July 2020, the State Council issued guidance to comprehensively promote the old reform, and in 2023, the Ministry of Housing and Urban-Rural Development and other departments issued a notice to continue to promote the old reform. From 2019 to 2023, 220,000 old urban communities will be renovated across the country, benefiting more than 38 million households and about 100 million people. By the end of 2023, the mainland has basically completed the basic goal of renovating 219,000 old residential areas during the 14th Five-Year Plan period. The old renovation involves the transformation of aging pipelines such as water, electricity and heat, the energy-saving transformation of buildings, the installation of elevators, the addition of parking spaces and charging piles, the addition of cultural and leisure, sports and fitness venues, and the addition of community service facilities such as pension and convenience.
On the one hand, a large number of old renovation communities will improve the pursuit of residents' quality of life, after the renovation and upgrading of the outside of the community, the possibility of residents upgrading the interior of the house will increase, on the other hand, building materials such as coatings often have a certain service life, and the building life is about 50-100 years, in the life of the house, it is necessary to repaint and renovate many times, and the sale of second-hand houses will also promote residents to carry out secondary decoration. According to the results of the seventh national census of the State Council, it is estimated that the stock of housing in China is about 51.699 billion square meters.
The trade-in policy further stimulates stock renovation. In March 2024, the State Council issued the Action Plan for Promoting Large-scale Equipment Replacement and Trade-in of Consumer Goods, deploying the trade-in of consumer goods. The plan supports more stock houses and second-hand houses to implement the renovation and partial renovation of old houses. All provinces and cities have responded positively, and local municipal governments have issued corresponding policies to subsidize the renewal of consumer goods, promote the implementation of policies, and stimulate residents' consumption. Among them, Shanghai, Guangzhou and other places have made it clear that the exterior wall insulation materials, doors and windows are updated and upgraded, and many places encourage and support the replacement of furniture and home decoration consumer goods, which has an obvious driving effect on the building materials industry and further stimulates the residents' demand for renovation.
The service life of consumer building materials is lower than that of house construction. According to the Ministry of Housing and Urban-Rural Development issued the "Unified Standard for Civil Building Design", the service life of civil buildings is generally 50-100 years, however, consumer building materials often have a lower service life than civil buildings, such as the most common coatings in renovation, the service life is 5-15 years, and the service life of sanitary ware is often 8-10 years. This supports the continuous renovation of the building during its life cycle, while also ensuring the demand for consumer building materials.
The building materials industry also has the logic of increasing penetration. From 2010 to 2023, the compound growth rate of the completed area of real estate will be -0.3%, but the compound growth rate of plastic pipes, gypsum board, coatings, and waterproofing will be 5.2%, 4.3%, 8.1%, and 8.7% respectively, all of which significantly outperform the completed area of real estate. We believe that with the improvement of residents' consumption level, the demand for improving the living experience has gradually increased, which has led to the increase in the penetration rate of consumer building materials in the later cycle.
2. Building materials cycle review: real estate as the anchor, three different development models
2.1 The cyclical fluctuations of the building materials industry are highly correlated with real estate
Historical fluctuations in the building materials industry are strongly correlated with real estate. On the one hand, the real estate industry is an important source of demand for building materials, and compared with the demand sources such as infrastructure, municipal, rural, and stock renovation, the demand for new houses naturally accounts for a relatively high proportion, and the fluctuation is relatively greater than that of infrastructure and municipal sources. On the other hand, in the sales structure of the main listed companies in the building materials industry, although there are distribution, direct sales, construction enterprises, decoration enterprises, retail customers and other sources, but the proportion of terminal penetration real estate is still large. Although there is a time lag in the fluctuation of real estate, it will also be reflected in the statements of building materials enterprises. Historically, the revenue growth rate of building materials enterprises has a high correlation with the income growth rate of the corresponding real estate stage. As we mentioned above, cement and glass have a strong correlation with the growth rate of newly started and completed areas, respectively. At the level of listed companies, we found that the revenue growth rate of the leading enterprises of building materials also has a strong correlation with the real estate data. It is worth mentioning that most of the time in the history of Oriental Yuhong, the single-quarter revenue growth rate can outperform the growth rate of real estate construction area and sales area at the same time. The single-quarter revenue growth rate of Beijing New Building Materials and Weixing New Materials has a strong synchronization with the growth rate of real estate sales area.
Looking back at the previous fluctuations in the building materials industry, we find that the stock price fluctuations of the building materials industry are strongly correlated with the fluctuations of the real estate cycle. A typical round of stock price fluctuations in the building materials industry is generally divided into six stages: 1. Under downward pressure, the gradual relaxation of policy sales restrictions has brought about valuation improvement; 2. The policy expectation has been digested, but the general fundamental improvement is relatively lagging behind, and the stock price of the sector has entered a fluctuating stage; 3. The policy has been effective, and the second round of upward revision of performance expectations has been brought about by the continuous improvement of real estate sales; 4. The economy is overheated, and the policy tightening suppresses the valuation of the sector and brings a decline; 5. Adjustment of fluctuations between policy tightening and deterioration of fundamentals; 6. The deterioration of fundamentals led to a downward revision in performance, and the stock price of the sector fell further. It is worth noting that: 1. There is a certain time lag between the policy shift and the fundamental turn, and this time lag is often the key time point for further confirmation of the left/right side of the industry. When the policy has not yet taken effect, due to the continuation of the previous trend in fundamentals, industry stocks generally have a pullback after rising or a rebound after falling. 2. The core of the change in policy expectations is to improve valuations, but the market brought about by the thickening of EPS with improved fundamentals tends to be larger; The policy is aimed at different stages of the real estate chain, and the performance of the corresponding early cycle/post-cycle will be different. 3. Real estate fundamentals and policy changes are often not a single cycle, but a large cycle nested with a small cycle, and it is necessary to distinguish the position of the large cycle and the small cycle respectively, so as to make better investment decisions. 4. During the real estate expansion cycle, building materials companies often follow the expansion of the balance sheet of real estate enterprises. The methods of balance sheet expansion include the expansion of operating assets (accounts receivable), the expansion of the balance sheet with leverage, and the expansion of the balance sheet with equity financing. For large B-end building materials enterprises, the pace of balance sheet expansion is often highly synchronized with revenue growth.
2.2 Three development models: balance sheet expansion + channel brand service + cost scale competition
Different building materials categories have different development models. Due to the different attributes of the product itself, building materials products have both the industrial attributes of midstream products and the consumption attributes of downstream products. The attributes of different products determine their different development and expansion models, and different development models can ultimately be reflected in different financial statement characteristics, and we will review the three different development modes through financial comparative analysis.
Growth grasp 1: the balance sheet expansion of building materials in the post-cycle of the project
The balance sheet is the source of a company's profits. The balance sheet includes the resources owned or controlled by the enterprise that provide the expected economic benefit to the enterprise, and indicates the source of rights (liabilities or equity) to the resources. Net profit = net assets * return on equity (ROE), from this level, enterprises to increase the scale of net profit, from the perspective of expanding the scale of net assets and improving the return on net assets. The growth pattern of balance sheet expansion is relatively common in the B-end post-cycle building materials category, such as waterproofing, ceramic tiles, exterior wall coatings, drainage pipes, etc. Balance sheet expansion mainly includes liability expansion, operating asset expansion and equity financing. These three approaches do not exist separately and often go hand in hand. Enterprises can obtain more orders by increasing liabilities and expanding production, extending the accounts receivable/bill period, and further expanding production through listed equity financing, and the enterprises choose a financing model suitable for themselves according to their own financing conditions, the market credit environment at that time, and the trustworthiness of customers.
The ability of capital turnover during the dividend period significantly affects the pace of the company's performance growth. In the past, represented by Vanke's "5986" high-turnover model, real estate enterprises advocated a high-turnover and low-inventory business model in the past, and had very high requirements for the rhythm of capital flow. This high-turnover model is a great test of the capital flow of large B-end building materials enterprises in the upstream of real estate. In order to keep up with the high turnover mode of real estate enterprises, many building materials enterprises at this stage to accelerate their expansion, leverage to absorb funds to expand production capacity and the supply capacity of the whole product scale, and to exchange for more orders from real estate enterprises with preferential account terms. Under this model, the income of many large B-end building materials enterprises has grown rapidly. The credit environment has a significant impact on the growth of corporate performance. Examples are "deleveraging" in 2017-2018 and "credit easing" in 2019. In September 2016, the State Council issued the "Opinions of the State Council on Actively and Prudently Reducing the Leverage Ratio of Enterprises", requiring enterprises to strengthen debt liquidation and debt restructuring, and do a good job of "three removals, one reduction and one supplement". The credit conditions of real estate enterprises and building materials enterprises have been tightened, coupled with the corresponding adjustment of real estate sales policies, the income growth rate of real estate enterprises in 2017 has dropped a lot.
Under the influence of the Sino-US trade war and macro policy deleveraging, the turnover of the real estate industry has slowed down, and the credit difficulties of large B-end building materials enterprises are tight, and the difficulties are significant. Since 2019, the policy environment for leveraging has become relatively loose, real estate has returned to high turnover, and credit channels for building materials enterprises have recovered. Superimposed policy requirements for hardcover houses, the demand for building materials at the engineering end is very strong, the revenue and profit growth is significant, and the building materials sector has also ushered in a strong bullish market. But on the other hand, the price of high turnover is relatively poor cash flow, and the construction materials consumed at the engineering end were burdened with heavier accounts receivable during that period.
Growth grasp 2: post-cycle retail building materials deep cultivation of brands, channels, and services
The building materials at the retail end are different from the engineering building materials and cycle building materials that are also in the post-cycle. Retail building materials due to the direct terminal of micro consumers and families, different from the engineering end, individual consumers often give product brand, service, quality to excess premium. At the same time, individual consumers often cash spot, there is no problem of account period, even if sold through dealers, building materials enterprises to dealers bargaining power is far stronger than real estate enterprises. The core competitiveness of post-cycle engineering building materials is scale, supply capacity and cash management ability, so the core competitiveness of the retail end of the post-cycle consumer building materials lies in the business model of attracting consumers such as brand, channel and service, which is a great test of the management ability of enterprise decision-making. Different business models determine that the retail side tends to have better cash flow quality and higher profit margins, but the relatively stable characteristics of retail determine that the growth pace of enterprises tends to be slower.
The consumer building materials at the retail end have a long slope and thick snow, and time is a friend of a good company. The consumer building materials industry is essentially stable business model, relatively stable products, with brand attributes, service attributes and high channel value, large industry space, and a trend of increasing concentration. It is difficult to produce huge product iterations in the consumer building materials industry, and it is difficult for the industry to have subversive changes, and the consumer building materials industry has the prerequisites for producing a good company.
The core competitiveness of C-end building materials is in construction services, marketing promotion, channel management and employee incentives. Construction services create differentiated competitiveness. Consumer building materials for consumers belong to semi-finished products, consumers often do not have the ability to install independently, and the real realization of its value depends on the construction service plus; In addition, the material manufacturing threshold of consumer building materials is low, and consumers are not enough to distinguish their differentiation, so construction has become the most profound differentiation link for consumers, and it has become a must for consumer building materials enterprises to create core competitiveness. The head retail building materials enterprises have layout construction services: Weixing New Materials pioneered the "Star Butler Service", which provides consumers with product authenticity inquiry, professional hydraulic testing, tightness testing, pipeline direction map shooting records, and notification of use instructions, etc., which solves most of the hidden dangers in the use of pipes. The whole process service of sales + installation + inspection + quality assurance solves most of the pain points of consumers in the process of installation and use of hidden pipeline projects, builds a differentiated competition path belonging to Weixing New Materials, enhances the image of the enterprise, and further enhances the added value of pipes.
3Trees provides consumers with a one-stop painting service of "live now". 3Trees provides consumers with a full range of fast and professional services through "live now", timely response to online appointments, free basic inspection, customized solutions, all-round masking protection, WeChat progress feedback, 8-hour check-in after completion and acceptance, and one-year warranty, which has won a strong service reputation and enhanced the competitiveness of the enterprise. Marketing promotion enhances market recognition. The characteristics of terminal retail require consumer building materials enterprises to enhance their visibility through advertising and other means, so as to achieve a higher customer acquisition rate. Weixing New Materials, 3Trees and other enterprises have a high proportion of sales expenses in revenue, and have a large amount of expenses in terms of corporate image. Weixing New Materials hired Liu Shishi to endorse Weixing Water Purification, 3Trees sponsored the Beijing Winter Olympics, and Dongpeng Holdings also hired Liu Tao and Wu Qianyu as brand spokespersons. Retail consumer building materials enterprises get closer to consumers through marketing and promotion, and enhance the consumption attributes of products.
Channels are the "core assets" of retail building materials. The distribution of production and sales in the building materials industry is not uniform, and the downstream customers are relatively scattered, and the procurement time and place are relatively random. The channel network layout itself has a first-mover advantage, and the channels with early layout can sell word of mouth and brand accumulation earlier within the community radius. Therefore, the existing channel layout, dealers, specialty stores, etc. can be described as "core assets" in the field of retail building materials.
The team's management efficiency, execution ability, and enterprising spirit are the core competitiveness that is easy to be overlooked. Building materials industry business miscellaneous, demand scattered, fierce competition, to build a good retail building materials company, very test the core team's management ability and execution ability, these can be depicted from the enterprise structure, historical evolution, incentive mechanism, sales staff salary and other dimensions.
Growth grasp three: the core of the cycle of building materials in the cost competition
Cement has changed from demand-driven to pattern-improvement-driven, and is currently in the stage of supply contraction/dividend pull. In 2015 and before, the rapid development of urbanization in mainland China and the growing demand of the cement industry led to the rapid growth of cement production and sales, which led to the improvement of cement performance and stock price. In 2016 and beyond, the demand of the cement industry gradually entered a stable state, and the staggered production and capacity replacement drove the improvement of the pattern of the cement industry, driving the cement price center upward, thereby driving the cement profit to a higher level. After 2021, the rapid decline in new real estate starts, the demand for cement will decline, and the tight balance between supply and demand brought about by the original pattern improvement will be broken.
Cost competition is the core competitive element of cement. Due to the homogeneity of cement, no inventory, short leg attributes, etc., cost competition has become the core competitive factor of the cement industry. The differences in the resource cost of limestone mines, the freight costs between the distance mine and the market, the production efficiency of cement kilns, the unit depreciation and amortization, and the unit management expenses of different cement enterprises directly form the profit differences of cement enterprises in the same region.
3. Transformation: Take the initiative to embrace the new stage of development
3.1 High turnover is no longer there, and the proportion of stock increases
After 2021, the industry has entered a stage of pressure from high turnover. After 2021, the financing of real estate enterprises will be limited, the high-turnover model will no longer be used, and the demands of real estate enterprises will change from rushing to scale to preserving cash. The profit margin of the real estate industry is under pressure, new construction, sales and other indicators have begun to decline, the upstream and downstream funds of the real estate chain are relatively tight, and many real estate companies have entered the debt repayment period or even defaulted on their debts. There are many irreversible changes compared to 2014 and 2008. Although there are similar patterns between real estate cycles, the whole is in a state of wave-like progress, and the current cycle is still different from the past few cycles. The difference is at least reflected in the fact that the leverage ratio of residents is no longer rising rapidly, the urbanization rate has been at a relatively high level, and the per capita housing area has been higher than in the past 2014 and 2008, which also means that the stock of housing may become the main body of demand in the building materials industry in the future.
The proportion of secondary decoration has increased rapidly. According to iResearch's report, among the decoration purposes of mainland home improvement users, 75.3% of the renovation or renovation of incremental houses and 24.7% of existing houses are renovated. The primary decoration accounted for 44.7%, and the second decoration accounted for 55.3%. The second decoration accounts for a relatively large proportion, whether it is a new hardcover house, a second-hand house or an existing stock of houses, there is a need for decoration. Most of the home improvement consumption levels are between 11-200,000 yuan. According to the Shell Research Institute, the consumption level of home improvement in mainland China is between 11-200,000 yuan, accounting for the largest proportion, 43.0%. 40.4% were within 100,000 yuan, 10.4% were 21-300,000 yuan, and 6.3% were more than 300,000 yuan.
The whole assembly greatly improves the convenience of consumers. Home decoration methods are usually divided into four ways: clear, half-pack, full-pack, and whole-pack. Under the four ways, the convenience and service experience of the owners are improved one by one, compared with the clear package that all materials need to be purchased in a time-consuming and laborious manner, the whole package only needs to be connected to the home improvement company to achieve "bag check-in". For home improvement companies, the whole home improvement has a higher profit margin, and at the same time, it can also be combined with high-margin smart home products. Therefore, the whole decoration not only improves the consumption experience of consumers, but also is the preferred way of home improvement companies.
The penetration rate of the whole decoration has increased, and the main consumer groups prefer labor-saving decoration methods. According to the Shell Research Institute, about 50% of the post-80s and post-90s people who choose the whole assembly and full-package repair mode are selected. According to Aowei Cloud Network, from 2019 to 2023, the penetration rate of the whole assembly will increase from 20.7% to 24.1%, and the scale of the whole assembly will increase from 684.1 billion to 947.3 billion. Consumer building materials have a brand effect. On the one hand, with the gradual increase in the country's requirements for green and environmental protection, the concept of environmental protection has gradually entered the hearts of consumers. The environmental protection attributes of the building materials industry are strong, and large companies often have more funds to invest in environmental protection research and development because of their higher revenue and profit scale, and it is difficult for small companies to pay attention to environmental protection. Therefore, consumers buy products for the sake of green and environmental protection, and promote the big brands in more detail. On the other hand, in the traditional consumer building materials purchase process, consumers are often difficult to make a choice among many homogeneous products, and the choice of large brands often represents better product quality, better service, and guaranteed, which will reduce the cost of consumer choice. With the passage of time, the brand effect of consumer building materials will become stronger and stronger, and the advantages of big brands will be further highlighted. The incremental real estate market is down, but the demand for home improvement will not degrade. The new real estate market has entered the bottleneck, but whether it is the purchase of new houses, the purchase of second-hand houses, or the improvement and renewal of existing houses, the demand for home improvement has always existed and the volume is huge. And, with the continuous updating of the concept of consumption, as well as the implementation of national policies such as trade-in, the demand for consumption upgrading still exists, and the improvement of consumer building materials such as system doors and windows, smart bathrooms and so on may usher in a new round of market. Mid-to-high-end brands seized the market, and the concentration continued to increase. Many segments of consumer building materials are showing a trend of increasing concentration, which is also a manifestation of consumers' attention to brands. With the overall downturn of the real estate industry, the total market volume has been compressed, some high-end brands have the financial strength to seize the market with price, and some brands have a good reputation and guaranteed product quality, and gradually win the trust of consumers, which will lead to the withdrawal of small enterprises and small brands. In the future, the market concentration is expected to be further increased, and the head consumer building materials enterprises have room for growth brought by the increase in concentration.
3.2 Enterprise transformation: three paths: retail, cross-sector, and stock housing
Building materials companies have begun to transform. A number of building materials companies are under pressure accordingly, the revenue growth rate has fallen and even the absolute value of income has declined, the accounts receivable problem has been exposed, and the impairment has greatly dragged down the performance of many enterprises. Whether it is the original engineering end of building materials, or the retail end of building materials enterprises, have entered the stage of transformation. There are three main directions of transformation: "the expansion of engineering channels to retail channels, cross-domain mergers and acquisitions, and the extension of the new housing market to the stock housing market."
The core of the transformation of the retail channel on the engineering side lies in the profit sharing with dealers. With the decline in real estate cash risk exposure and the decline in the area of new construction, the building materials enterprises that originally relied on the B side to achieve rapid growth in revenue volume either foresaw or passively expanded the retail layout. The engineering side tests the ability of building materials enterprises to supply in large quantities, tests cash flow and account period, and the core is actually the ability to credit and leverage; The retail channel needs to test the management ability, service ability, product strength, channel layout ability, for the transformation stage of the enterprise core is how to support dealers, how to make profits with dealers, to achieve profit sharing. The core of cross-domain expansion is how to achieve efficient management. From a passive perspective, in the case of declining market size growth and more fierce competition in the original field, cross-domain expansion has become urgent; From an active perspective, if channels and brands can be shared between different fields, there is a synergistic effect, and cross-field expansion can achieve the effect of "1+1>2", so it is more necessary to expand and seek a second growth curve. Cross-field expansion, whether endogenous or epitaxial mergers and acquisitions, how to deal with different categories of brands, channels, supply chains, product competitiveness, etc., is a great test of the company's management capabilities. The extension of new housing to the stock housing market will test the service capacity even more. New houses are gradually saturated, but there is still a need for renovation and renovation of many existing houses in the mainland. Compared with new houses, the demand for renovation of existing houses is more fragmented, and often has higher requirements for timeliness and environmental protection. Consumer building materials companies that can provide transportation, installation, painting and other services are expected to win the trust of consumers and stand out in the competition in the stock housing market.
Weixing New Materials: Focus on retail, product + service to system integration + service expansion. Weixing New Materials business is mainly divided into retail business and engineering business, of which retail business is an important source of revenue and profit for the company. From 2020 to 2023, Weixing New Materials has increased its sales branches from more than 30 to more than 50, more than 200 professional marketing service personnel, and more than 28,000 marketing outlets from more than 28,000 to more than 30,000. From 2019 to 2023, the company's revenue and profit also achieved good growth, with a CAGR of 8.1% in operating income and 9.9% in net profit attributable to the parent company. Beijing New Building Materials: Deepen the integration of one body and two wings, and accelerate the expansion of mergers and acquisitions. The gypsum board products of Beijing New Building Materials are mainly sold through channels, and the current marketing network has fully covered major cities in China and counties and townships in economically developed areas. At the same time, the company is promoting the transformation of "tooling to home decoration" and "city to county and township", and deeply cultivating the home improvement business channels, which is also the company's measures under the expected increase in the proportion of second-hand housing decoration and stock housing renovation in the future. From 2019 to 2023, the operating income and net profit attributable to the parent company of Beijing New Building Materials have maintained good growth.
Oriental Yuhong: Retail priority, the development of partner channel sales model in engineering business. In 2023, Oriental Yuhong will deepen its retail channels, and the proportion of retail channel operating revenue will increase from 23.23% to 28.29%. At the same time, the company has changed its direct selling thinking, developed various partner models, empowered the development of partners, and improved the operation and management capabilities of partners. Rabbit Baby: Pay attention to small B businesses such as furniture factories and home improvement companies. The sales channels of Bunny are divided into four channels: retail, furniture factory, home improvement company and engineering. In recent years, the company has attached great importance to the development of customized home furnishings, and strengthened the construction of small B channels such as furniture factories and home improvement companies. In the decorative materials business, the proportion of furniture factory channel increased rapidly, from 8% in 2018 to 31% in 2023, while the retail channel decreased from 73% to 55%.
3.4 Focus on the main business, expand the side business, and increase the unit price of customers
Weixing New Materials: Concentric Circle Strategy. Weixing New Material's concentric circle products include a series of pipe products with PPR products as the core, including drainage pipes, floor heating pipes and other pipes, as well as waterproof and water purification business categories. On the basis of pipes as the main business, the waterproof and water purification business is the expansion of the pipe business scenario, and the two belong to the same channel. The implementation of the concentric circle strategy can help to significantly increase the average order value.
North New Building Materials: One body and two wings. In 2019, the company sorted out and determined the development goal of "one body, two wings, global layout". The main business of Beijing New Building Materials is gypsum board, and the two wings are the coating industry and waterproof industry. In 2019, the company formed a waterproof layout covering the whole country through the joint reorganization of waterproof enterprises such as Sichuan Shuyang and Beixin Yuwang. In 2023, the company will jointly reorganize Carberry to strengthen the paint sector. From 2019 to 2023, the proportion of waterproof building materials in operating income increased from 1.54% to 17.41%, and the proportion of coating building materials in operating income in 2023 was 1.76%. Both sectors can contribute to the company's profits, with a gross profit margin of 19.12% for waterproof building materials and 28.91% for paint building materials in 2023. Oriental Yuhong: multi-category development path. In addition to focusing on the two main businesses of waterproofing and paving and sewing, Dongfang Yuhong's China National Construction Group also continues to cultivate putty powder, glue, wall accessories and other categories, and incubates kitchen and bathroom hardware, tool consumables, household wires and other categories, in order to gradually realize a one-stop building materials purchase platform for consumers, which is a development measure from the perspective of consumer experience. Dongpeng Holdings: "1+N" multi-category product service model. Dongpeng Holdings' main business is ceramic tiles, but on this basis, the company also covers sanitary ware, auxiliary materials, integrated wall panels, ecological stone, ecological soft porcelain, lightweight partition panels and other "N" class products, in order to drive the sales of other N products through the sales channels of ceramic tiles, to achieve one-stop hard decoration product solutions for users, which is in line with the development path of the whole concept. "1+N" can increase the order value and the repurchase rate of customers.
4. Stones from Other Mountains: The Development Path of Overseas Enterprises
This part reviews the growth paths of Sherwin-Williams, Vulcan and Carlisle, and realizes contrarian growth in the downward cycle of real estate by seizing the stock market demand, focusing on the main business, acquiring to enhance synergies, and timely divesting and dragging down businesses.
4.1 Sherwin-Williams: Seize the market demand for recoating, acquire and increase the scale
Founded in 1866 in the United States, Sherwin-Williams is a global coatings brand integrating R&D, production and sales of coatings, with operations in more than 120 countries around the world. Sherwin-Williams' coatings are used in a variety of sub-sectors, including industrial, wood, packaging, coils and profiles, automotive coatings, industrial heavy-duty anti-corrosion coatings, marine coatings, water-based coatings, UV coatings, and more. From 1980 to 2023, Sherwin-Williams stock price grew from $35 per share to $311 per share, with a CAGR of 9.48%. Sherwin-Williams' journey can be divided into 4 phases. Phase I: 1866-1922, Initial Period. Sherwin-Williams was founded in 1866, during the period of American reconstruction after the Civil War. Sherwin-Williams seized the opportunity to develop, and in 1880, Sherwin-Williams invented the world's first can of refined oil paint and sold the world's first blending paint. In 1922, Sherwin-Williams entered the automotive coatings market and grew rapidly in the automotive market. The second stage: 1923-1977, the period of development and expansion. On the one hand, Sherwin-Williams began to expand internationally, and in 1930 Sherwin-Williams opened its first Shanghai office. On the other hand, Sherwin-Williams continued to make efforts in the field of coatings and broaden the category. In 1940, Sherwin-Williams launched the first latex paint, "Kem-Tone", and in 1951, Sherwin-Williams launched the first interior wall latex paint, "SuperKem-Tone". Sherwin-Williams went public on the New York Stock Exchange in 1964, and in 1977, Sherwin-Williams had sales of more than $1 billion.
The third stage, 1978-2008, was a period of rapid increment. During this period, the U.S. economy prospered, and Sherwin-Williams also developed rapidly. In 1993, Sherwin-Williams became the first ISO9002-recognized coatings company in the U.S., and in 2008, Sherwin-Williams achieved annual sales of $8 billion, a CAGR of more than 7% during that period. The fourth stage, from 2009 to the present, is the period of stock expansion. With the decline in the prosperity of the new housing market, the demand for stock recoating is becoming more and more obvious. Sherwin-Williams seized the opportunity to expand against the trend, acquiring brands such as Cerli, Bergromma, Leigh Paints, and Valspar, and growing revenue to become a global leader in coatings.
After 2005, new home sales in the U.S. gradually declined. New home sales in the United States maintained a steady growth trend from 1991 to 2005, from 509,000 to 1,283,000 units, with a CAGR of 6.8%. The U.S. housing market began to fall in 2006, followed by the subprime mortgage crisis and the financial crisis in 2007, followed by a sustained decline in new home sales in 2011, but is still at the 1995 level. Sherwin-Williams' significant revenue growth was driven by the acquisition of other companies and the rise of the recoating market. Although the sales of new homes in the United States remained low during this period, Sherwin-Williams' revenue continued to grow during the rest of the period, except for the decline in revenue from 2008 to 2009 due to the financial crisis, and the growth rate was considerable. On the one hand, Sherwin-Williams has expanded its scale through the acquisition of brands and companies, and in recent years, Sherwin-Williams has acquired brands such as Shierli, Berg Roman, Leigh Paints, Valspar, etc., especially the acquisition of Valspar, according to Sherwin-Williams' estimates, can increase the profit margin of coatings by 2pct, and significantly increase the scale of revenue and market share in the Asia-Pacific region. On the other hand, Sherwin-Williams seized on the rise of the recoating market. The reasons for the strong demand for recoating in the United States include: 1) the age of the stock housing is increasing year by year; 2) the rise of remote work models; 3) The scale of the post-disaster reconstruction market is increasing year by year. From 2006 to 2023, Sherwin-Williams' operating income CAGR reached 6.57%, achieving contrarian expansion in the relatively low level of the new housing market.
4.2 Vulcan: Expand scale, focus on the main business, and achieve high growth
Vulcan Materials Company is the largest producer of sand and gravel aggregates in the United States. Its headquarters are located in Birmingham, Alabama, formerly known as the Birmingham Slag Company, which was founded in 1909. Vulcan has 404 aggregate production facilities, 71 asphalt facilities, and 142 concrete facilities, mostly located in the United States. Vulcan's development can be divided into 4 stages. The first stage: 1909-1956, the initial development period. Since the establishment of Vulcan's predecessor, the Birmingham Slag Company, the company has continued to grow. In 1942-1945, the company supplied building materials for military projects; In 1951, the company became a major aggregate supplier for the U.S. Highway Program. In 1956, the company was listed on the New York Stock Exchange and was renamed Vulcan Materials by the Birmingham Slag Company. The second stage: from 1957 to 2004, the dual business expansion period of "aggregates + chemicals". Since Vulcan's listing, the company has continued to acquire other aggregate companies for scale expansion and expansion in different geographies through acquisitions. In addition, Vulcan established a chemicals division in 1957, with the acquisition of an organochlorine plant in 1968 and a chlor-alkali plant from BASF in 1980. During this period, the company continued to build factories to produce related chemicals and expand its aggregates and chemical business. The third stage: 2005-2015, the period of strategic consolidation. In 2005, the company sold its chemicals division, and in 2013, the company divested part of its cement and concrete operations. During the period, the company continued to acquire aggregate facilities and focused on the construction of its main business. In 2009, due to the impact of the financial crisis, the company's revenue fell by 26%, and then the revenue returned to growth, and in 2015, the basic recovery to the 2007-2008 point. Phase 4: From 2016 to 2023, a period of high growth. After divesting its chemicals business in the early stages to focus on its main business and gradually recovering to pre-financial crisis revenue levels, the company has embarked on a new level of revenue growth and continues to strengthen its scale and competitiveness in aggregates through acquisitions. In 2021, Vulcan acquired the American Concrete Company and expanded its coverage units to New York and New Jersey. During this period, the company's revenue grew rapidly, with a CAGR of 11.67%.
Vulcan has maintained rapid growth since 2016, mainly due to the company's advantages and the characteristics of the U.S. aggregates industry. The company's business strategies and advantages include: 1) Focus on the aggregate industry. Before 2000, Vulcan had a large chemical business and concrete business, and after a strategic consolidation from 2005 to 2015, the company focused on cement construction, retaining only part of the asphalt and concrete business. In 2023, 89% of the company's gross profit will come from aggregates and 11% from asphalt and concrete. 2) Maintain the leading position in each region. Vulcan continues to cover the U.S. multi-regional market through acquisitions. Today, the company primarily covers the southern United States, where the company's leading markets provide 90 percent of revenue. 3) Low transportation cost. Aggregates have the characteristics of relatively high transportation costs, and in most cases, users will buy aggregates nearby. The company has set up operations close to the local market, and in 2023, 82% of the company's shipments were shipped directly to customers by truck. The U.S. aggregates industry is doing better, mainly in demand and price. There are many sources of aggregate demand in the United States, including infrastructure construction such as highways, bridges, and airports, as well as the construction of private and public buildings. From 1982 to 2006, aggregate demand maintained a high growth, and then fell due to the financial crisis and the subprime mortgage crisis, and began another round of growth after 2010. Although demand declined significantly between 2006 and 2010, aggregate prices continued to grow between 1982 and 2022. According to the company's report, aggregate prices have maintained high growth in the past three years, and on this basis, the company's gross profit per ton under operation and construction has continued to increase, with a CAGR of 8.4% from 2018 to 2023. Among them, according to the quarterly average price, the industry price CAGR in 21-23 years is 11.01%, and the gross profit CAGR per ton of Vulcan is higher than the industry price CAGR, reaching 12.84%, reflecting the company's operation and management results.
4.3 Carlisle: After experiencing rapid growth, the implementation of business transformation has been recognized by the market
Carlisle's predecessor, Carlisle, the Tire and Rubber Company, began operations in Pennsylvania in 1917. Today, Carlisle has become a decentralized, diversified global manufacturing company offering a wide range of industrial products and solutions. Carlisle is divided into two divisions, Carlisle Building Materials (CCM) and Carlisle Waterproofing Technologies (CWT), which provides products and related technologies for buildings, including EPDM, TPO, PVC, metal and rooftop garden systems. Carlisle Waterproofing Technologies is a leading supplier of building envelopes, including high-performance waterproofing products, protective roof underlayments and more. Carlisle's journey can be divided into 4 phases. Phase I: 1917-1954, Initial Period. At this stage, after Carlisle was founded, it mainly developed the tire and rubber industries, and successfully survived the Great Depression in the United States. The second stage, 1955-1988, was a period of modernization exploration. In 1955, Carlisle transformed from a tire and rubber company into a business that promoted an entrepreneurial culture and implemented an aggressive M&A strategy. During this period, Carlisle acquired a series of products, including wires and cables, high-temperature conductors, etc. The company went public on the New York Stock Exchange in 1960 and continued its acquisition strategy. In 1961, Carlisle developed Sure-Seal, a synthetic rubber for roofing, and sales grew rapidly in 1978, becoming the company's star product. The third stage, from 1989 to 1999, was a period of rapid growth. Since the 80s, there has been an increase in demand for buildings in the United States, driving the demand for roofing systems. Carlisle roofing products are growing rapidly. In 1989, Carlisle had sales of $553 million. At this stage, Carlisle continued to make acquisitions in order to increase its share. Carlisle entered China in 1994. Between 1989 and 1999, Carlisle sales grew from $553 million to $1.6 billion, with a CAGR of 11%. The fourth stage, 2000-present, is the period of business transformation. During this period, Carlisle focused on management and operational optimization, and continued to expand by focusing on its main business. During this phase, Carlisle acquired a large number of building materials companies and sold its two business units, Carlisle Connectivity and Carlisle Fluid Technologies, from 2023 to 2024, transforming itself from a diversified company to a pure building products company. Carlisle's share price has hit new highs in recent years and will continue to rise in 2024. From 1981 to 2023, Carlisle's share price CAGR reached 6.57%.
The rapid growth of Carlisle's share price in 2023-2024 may be related to its new round of business consolidation. In 2022 and earlier, Carlisle formed 4 major businesses through acquisitions: Carlisle Building Materials (CCM), Carlisle Waterproofing Technologies (CWT), Carlisle Interconnect Technologies (CIT), Carlisle Fluid Technologies (CFT). In order to build a more focused business group in Building Materials, Carlisle sold its Carlisle Fluid Technologies business in 2023 and Carlisle Connected Technologies in 2024, retaining only the Building Materials and Waterproofing Technologies businesses. Carlisle Fluid Technologies made a small overall contribution to revenue after the acquisition in 2015, with an overall margin of around 10 percent, and the company sold it primarily for strategic reasons. Carlisle's interconnection business has contributed significantly to revenue and profit in the past, contributing about 20% of revenue and 20%-35% of gross profit from 2016 to 2019. The interconnection business mainly produces wires and cables and other machinery for commercial aerospace, military and defense. Affected by the epidemic in 2020, the commercial aerospace market was hit harder, the interconnection business was greatly implicated, and the gross profit turned negative, although it rebounded in 2022, it is still in a state of low gross profit margin. The sale of its interconnection business can optimize capital allocation and enable it to focus more on its main business, which is in line with its strategy and has also been recognized by the market.
(This article is for informational purposes only and does not represent any investment advice from us.) To use the information, please refer to the original report. ）
Selected report source: [Future Think Tank]. Future Think Tank - Official Website