Revenue is growing again, so why are profits still falling?

  • In the third quarter of 2026, Beixin Building Materials’ revenue rose 2% year on year, ending five consecutive quarters of decline and coming in slightly above Goldman Sachs’ forecast. Net profit, however, fell 19% to 529 million yuan, while core profit declined 15% to 545 million yuan; both were below the bank’s expectations.
  • The difference lay mainly in gross margin, which fell by about 2 percentage points year on year in the quarter. Costs for asphalt, facing paper and coal rose, while weak demand limited the pass-through of price increases. Gypsum board sales volumes also continued to fall, adding pressure from the allocation of fixed costs.
  • Expense control provided only a partial buffer: operating expenses fell 1% year on year in the quarter, in contrast to revenue growth, and the expense ratio improved by about 0.5 percentage points.

What exactly has improved from the adjustment in gypsum board volumes and prices?

  • The year-on-year decline in gypsum board sales volumes narrowed from 15% in the first half to 9% in the third quarter, while the year-to-date average selling price rose 2.6% year on year. The improvement lies in preserving prices while moderating the decline in sales volumes; volumes have yet to return to year-on-year growth.
  • Brand differentiation supported the adjustment: Longpai and Taishan continued to move their products upmarket, while Mengpai expanded into the lower-priced market to counter competition from small manufacturers. Sales volumes for all three brands rose significantly quarter on quarter.
  • Management expects industry demand to bottom at around 2.8 billion square meters in 2026, remain broadly flat in 2027, and gradually return to around 3 billion square meters over the following two to three years. Near-term recovery therefore depends more on shutting down, disposing of or converting some plants, as well as optimizing production, logistics and energy use. Management estimates these measures could save several hundred million yuan in costs.

Can growth in waterproofing and coatings lift profits?

  • Waterproofing revenue grew by a high single-digit percentage year on year in the third quarter. The price increase in October is expected to support fourth-quarter revenue and ease pressure on gross margin. However, against the backdrop of a 25% year-on-year decline in new construction starts in the first nine months, management believes the existing waterproofing market could still shrink by around 10%.
  • If sales volume growth remains healthy after the October price increase, the company may raise prices by another 1 yuan per square meter, restoring the waterproofing gross margin to around 20%. To push it further above 25%, management believes asphalt costs would need to fall substantially or industry coordination would need to support sustained, steady price increases.
  • Coatings continued to prioritize gaining market share. Both consumer and corporate customer channels gained share in the third quarter, but lower selling prices limited year-on-year revenue growth to low single digits. Management expects architectural coatings demand to fall by around 5% annually; fragmented competition also limits cost pass-through, so share gains and pressure on profits will coexist.

Operating cash flow plunged: what supports the full-year outlook?

  • Third-quarter operating cash flow fell 84% year on year, which the company attributed to advance purchases made in response to raw material price volatility. Bringing purchases forward increased cash outflows in the quarter, adding an important source of pressure alongside the stabilization of revenue.
  • Accounts receivable turnover days remain consistent with seasonal patterns, with collections typically concentrated in the fourth quarter. Based on this timing, Goldman Sachs expects the ratio of full-year 2026 operating cash flow to net profit to be around 1.3 times; its full-year outlook depends on a recovery in fourth-quarter collections.

Why does Goldman Sachs maintain its Buy rating after cutting earnings forecasts?

  • Goldman Sachs raised its revenue forecasts for 2026–2028 by an average of about 1% and lowered its net profit forecasts by an average of about 5%: improved volumes and prices add revenue, but raw material inflation slows the recovery in gross margin. Its 12-month target price was cut from 20.1 yuan to 19.8 yuan.
  • The Buy rating rests on valuation being near historical lows and continued progress in brand adjustments and cost optimization. The report lists forecast price-to-earnings ratios for 2026–2028 of approximately 13, 10 and 8 times, respectively, and a dividend yield of around 4%.
  • The recovery in 2027 also includes management’s expectation of a significant reduction in historical waterproofing impairments and increased sales of premium gypsum board. The company aims to raise sales of new premium products from 10 million–20 million square meters in the first nine months of 2026 to 100 million square meters in 2027. If achieved, Goldman Sachs estimates this could add around 3% to its 2027 net profit forecast.