Stabilizing building-materials TAM and strategic pivots drive valuation recovery; Goldman Sachs favors Oriental Yuhong and Skshu Paint Co.

Overview

This report covers four companies in China's building-materials sector: Oriental Yuhong, Skshu Paint Co., Beijing New Building Materials, and Vasen. Goldman Sachs believes the industry is gradually shifting from being driven by real-estate new starts to being driven by renovation, retail, and consumer characteristics. Building-materials companies' share-price correlation with property developers is declining, while their correlation with discretionary consumer sectors is rising. The core conclusion is that the cessation of TAM decline, bottoming and improvement in profitability, and recovery in cash returns will be key to establishing a floor for valuation multiples and supporting share-price recovery.

Core views

First, industry TAM contracted by approximately 20% from 2021 to 2025, while the four leading companies' market capitalizations declined by approximately 70% on average from their peaks. The market-cap adjustment significantly exceeded the earnings impact, leaving room for valuation recovery. Second, aging housing stock, second-hand home transactions, and previously deferred renovation demand will offset the contraction in new housing. At the end of 2025, approximately 44% of homes were over 20 years old, up from 35% at the end of 2020. Third, retail channels, lower-tier markets, and cross-selling will contribute nearly all revenue growth from 2025 to 2028E. Skshu Paint Co. will benefit the most, while Oriental Yuhong also has an overseas expansion advantage. Fourth, easing raw-material cost pressures, a higher retail-channel mix, and SG&A optimization will drive improvements in gross margin, net margin, and CROCI.

Analysis framework

The report assesses earnings recovery using top-down TAM estimates, housing-stock replacement cycles, second-hand home transaction disruptions, channel-structure changes, company-level revenue forecasts, price-to-raw-material cost ratios, SG&A efficiency, and CROCI improvement. For valuation, it uses EV/GCI vs. CROCI or EV/DACF as core frameworks, while referencing global peer valuations and historical premiums and discounts.

Methodology notes

• Valuation methodsEV/GCI vs. CROCI

  Measures market valuation using enterprise value relative to invested capital and matches it with cash return on investment.

  Goldman Sachs believes this framework reflects how the market prices companies' invested capital and cash returns. The report expects the four companies' 12-month forward EV/GCI multiples to expand by 0.1x from June 2026 levels. Multiples for Buy-rated companies could expand by as much as 0.3x due to stronger CROCI improvement.

• Industry demandTAM and renovation replacement-cycle model

  Uses replacement cycles of 8-20 years for different building materials to estimate theoretical renovation demand, while incorporating second-hand home transactions to adjust the timing of actual demand release.

  The model assumes that approximately 30% of the demand area generated by second-hand home transactions overlaps with renovation demand and deducts this amount to assess whether renovation demand can offset the decline in new-housing demand.

• Profitabilityprice-to-raw-material cost ratio

  Measures the ratio of unit selling price to unit raw-material cost.

  The report believes retail channels have stronger pricing power and cost pass-through capabilities. When raw-material costs decline or stabilize, this supports gross-margin recovery, particularly benefiting Skshu Paint Co. and Oriental Yuhong.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Oriental Yuhong (002271.SZ)

  Buy-rated and one of the report's top picks.

  Strengths

  Expansion of overseas production capacity and channel networks, the lower-tier county-level 3515 plan, cross-selling of mortar and coatings, and strong CROCI improvement.

  Weaknesses

  Domestic waterproofing TAM is approaching a plateau and the company still needs to rely on overseas and lower-tier markets to offset slowing domestic demand.

  Comparison

  Compared with peers, Oriental Yuhong has a clearer overseas expansion path, with its target price implying approximately 47% upside.

  Risks

  Slower-than-expected overseas capacity ramp-up, weaker-than-expected county-level retail execution, and unfavorable raw-material costs or price pass-through.

• Skshu Paint Co. (603737.SS)

  Upgraded from Neutral to Buy.

  Strengths

  Rapid retail-business growth, high visibility for the Live-in Renovation and Beautiful Villages projects, substantial SG&A optimization potential, and CROCI expected to reach a historical high.

  Weaknesses

  Margin recovery remains affected by expense pressure, while declines in project channels require continued offsets from retail and cross-selling.

  Comparison

  The report believes Skshu Paint Co. has the strongest CROCI recovery elasticity among the four companies, with valuation benchmarked against average paint-industry peer levels.

  Risks

  Lower-than-expected retail wall-paint sales, slower cross-selling, and rising unit raw-material costs.

• Beijing New Building Materials (000786.SZ)

  Downgraded from Buy to Neutral.

  Strengths

  The gypsum-board business has an industry-leading position, while internal organizational adjustments and brand integration may bring short-term efficiency gains.

  Weaknesses

  Approximately 80% of industry demand remains concentrated in B2B new-build projects. Retail and lower-tier-market execution lags Oriental Yuhong and Skshu Paint Co., and CROCI improvement is limited.

  Comparison

  Valuation applies a 25% discount to the global peer average, reflecting historical discounts and insufficient return improvement.

  Risks

  Continued weakness in gypsum-board demand, intensifying low-price competition, and slower-than-expected retail transformation.

• Vasen (002372.SZ)

  Upgraded from Sell to Neutral.

  Strengths

  Already has a strong retail-channel foundation and is expanding into lower-tier cities and product-plus-service offerings.

  Weaknesses

  Retail-channel competition is intensifying, growth is expected to be moderate, and CROCI upside is only approximately 1 percentage point.

  Comparison

  Valuation applies a 10% discount to the average of pipe and 2C peers, leaving less recovery potential than Buy-rated companies.

  Risks

  Persistently weak demand, competitors shifting from engineering channels into retail, and underperformance in cross-selling category growth.

Key data

• Industry TAM change in 2021-2025-20%The report states that industry TAM contracted by approximately 20% from 2021 to 2025.
• Peak-to-trough market-cap decline of the four leadersApproximately 70%The report believes the market-cap decline far exceeded the actual earnings impact, mainly due to valuation-multiple compression.
• 2025-2028E TAM CAGR for the four building-material subsectors-2% to +1%Goldman Sachs expects industry TAM to stabilize rather than continue declining.
• 2028E-2035E TAM CAGRFlat to +5%TAM is expected to gradually return to peak levels over the long term.
• Share of homes over 20 years old at end-2025Approximately 44%The figure was approximately 35% at end-2020, with aging housing stock supporting renovation demand.
• 2026E-2028E EPS CAGR for the four companies9%-29%Compared with a median performance of approximately -8% in 2025.
• Average net-margin expansion of the four companies from 2025 to 2028EApproximately 4 percentage pointsThe report also expects average CROCI to improve by approximately 3 percentage points.
• Oriental Yuhong overseas revenue outlook2026E-2028E CAGR 73%Overseas expansion is expected to account for an average of 19% of total revenue during the period and contribute approximately 76% of revenue growth.
• Skshu Paint Co. retail projectsLive-in Renovation and Beautiful VillagesThe report expects the two retail businesses to achieve more than 3x and 1x revenue expansion, respectively, from 2025 to 2028E.
• 12-month implied sector upside13%-53%Oriental Yuhong's target price implies approximately 47% upside.

Impact & implications

If Goldman Sachs' assessment is correct, the primary pricing anchors for building-material stocks will shift from the real-estate new-start cycle toward consumer renovation, retail-channel capabilities, cash returns, and overseas expansion. Oriental Yuhong and Skshu Paint Co. receive more positive ratings because of clearer CROCI improvement and growth drivers. Although Beijing New Building Materials and Vasen show signs of operational-efficiency improvement or demand bottoming, their long-term TAM, competitive dynamics, or room for return improvement is more limited.

Risks

• A greater-than-expected decline in real-estate new starts, causing new-housing demand to continue weighing on TAM.
• Weak consumer confidence delaying the release of renovation and replacement demand.
• Retail-channel expansion, lower-tier-market penetration, or county-store economics falling short of expectations.
• Raw-material prices rising again without successful pass-through to end-market prices.
• Overseas capacity construction, sales-network expansion, or cross-regional synergies progressing more slowly than expected.
• Intensifying industry competition causing price, gross-margin, and CROCI recovery to fall short of expectations.

What to watch

• Ramp-up in capacity utilization and production-to-sales ratios at Oriental Yuhong's overseas bases in Mexico, Malaysia, the Middle East, and other regions.
• Expansion of Oriental Yuhong's county-level outlets under the 3515 plan, same-store sales, and progress toward the Rmb5bn+ revenue target.
• Store expansion, volume growth, and cross-selling rates for Skshu Paint Co.'s Live-in Renovation and Beautiful Villages businesses.
• Whether TAM for architectural coatings, waterproofing materials, gypsum board, and PP-R pipes stabilizes as expected.
• Changes in raw-material prices, product selling prices, and the price-to-raw-material cost ratio.
• Actual delivery of CROCI, net margin, free cash flow, and dividend visibility for the four companies.