Weixing New Materials: Core Profit Under Pressure, Maintain Neutral

Overview

Goldman Sachs released an earnings review for Weixing New Materials' second quarter of 2026, noting that while reported net profit significantly exceeded expectations due to one-time gains, core profit reflecting main business profitability actually declined YoY and missed expectations. The report argues that current demand remains weak, with both retail and engineering channels facing pressure. However, the company has demonstrated operational resilience through price hikes, product mix optimization, and overseas expansion. Given that the short-term risk-reward ratio is approaching balance, the institution maintains a "Neutral" rating and slightly lowered its 12-month target price to Rmb9.0.

Core views

Divergence in Earnings Quality: Core Profit Pressure vs. One-time Gain Distortion. In 2Q26, the company's attributable net profit reached Rmb271m, a 72% YoY increase, seemingly far exceeding market expectations. However, this growth was primarily driven by one-off items such as acquisition-related gains and investment income. Excluding these non-recurring items, 2Q26 core profit was only Rmb128m, a 17% YoY decline and 22% below Goldman Sachs' expectations. This indicates that under conditions of insufficient consumer confidence and intensified competition, the actual profitability of the company's main business continues to face pressure. Although cash flow remains healthy (operating cash flow/net profit ratio of 1.1x), the negative growth in core profit reveals substantive challenges on the demand side. Demand Outlook: Weak Short-Term Recovery, Long-Term Growth Path Dependent on Transformation. Management admitted that as of early Q3, there are still no signs of demand recovery, and the full year will likely face dual challenges of weak demand and fierce competition. Domestic revenue in H1 decreased by 11% YoY; although this outperformed the industry average decline of the mid-teens percentage, showing some share resilience, it still lagged behind the full-year single-digit growth guidance. Dragging factors come mainly from two aspects: first, sluggish PP-R sales at the retail end and cross-selling of concentric circle products (waterproofing, water purification) falling short of expectations; second, a sharp drop of over 20% in PE pipe sales at the engineering end. The report believes the company is attempting to counter the real estate downturn cycle by increasing output per household and transitioning to services, but this requires time for verification. Gross Margin Resilience: Pricing Power and Structural Optimization Offset Cost Pressures. Despite rising raw material costs, the gross margin in 2Q26 showed unexpected resilience, improving by 1 percentage point YoY in H1. This is mainly due to three points: first, PE pipes achieved gross margin improvement through single-digit price hikes and optimized procurement costs; second, gross margins of other products like waterproofing and water purification increased; third, the revenue structure tilted towards higher-margin products. Notably, although PP-R pipes saw deteriorated margins due to petrochemical raw material price hikes, the company is one of the few mainstream manufacturers to successfully raise prices this year, expanding its premium over the mass market from 20%-30% to 30%-50%. This pricing power is the key moat for the company to maintain profitability in adverse times. Overseas Business and New Growth Points: International Layout Shows Initial Results. Overseas revenue performance was bright, with the share of total revenue in H1 rising from 6% in full-year 2025 to 9%, with Singapore's Fast Flow and the Thailand factory contributing about 63% of overseas sales. This provides a buffer for the company to diversify single-market risks. Additionally, management mentioned that with increased policy support for urban renewal, PE product sales are expected to improve sequentially, but financing implementation remains the main obstacle to accelerating execution. Output per household achieved double-digit growth in H1, partially offsetting the impact of a decrease in serviced households, verifying the effectiveness of the "quality improvement" strategy. Valuation and Shareholder Returns: Adjustment of Profit Forecasts and High Dividend Commitment. Based on the latest results, Goldman Sachs raised its 2026 net profit forecast by 3% (including one-time gains), but lowered its core profit forecasts for 2026-2028 by 4%-20%, and reduced revenue forecasts for the same period by approximately 7%. The target price was lowered from Rmb9.3 to Rmb9.0, based on a 12.3x EV/GCI and CROCI valuation model. The current stock price implies P/E ratios of 17x/16x/25x for 2026/2027/2028, with a dividend yield of approximately 5%. Management reiterated maintaining a high dividend ratio of 70%-80% (at the high end of peers), combined with recent share purchases by the chairman, providing a certain safety margin for the stock price. The report believes that current valuations have fully reflected fundamental pressures, and the risk-reward ratio is balanced.

Analysis framework

The research report adopts a binary analysis approach of "reported performance vs. core profit," first stripping away one-time gains to restore the true operating status, avoiding being misled by superficial high growth. It then decomposes gross margin changes along the logic of "volume-price split," distinguishing between raw material cost shocks and the hedging effects of the company's proactive price hikes/structural optimizations, thereby assessing the enterprise's pricing power and anti-cyclical capability. In terms of demand judgment, it combines management guidance, industry comparative data, and channel-specific (retail/engineering/overseas) performance for cross-validation, rather than relying solely on aggregate data. Finally, it employs a valuation framework combining EV/GCI and CROCI, considering both capital efficiency and cash flow returns, and specifically focuses on the supporting role of dividend policies for investment value under a Neutral rating.

Methodology notes

• Company Fundamentals and Financial FrameworkProfitability Quality Analysis

  Distinguishing Reported Net Profit from Core Profit

  The report deliberately excludes non-recurring items such as acquisition gains and investment income to calculate 'core profit,' more accurately measuring the company's main business's true blood-making ability. When reported net profit surges while core profit declines, it usually means that earnings growth is unsustainable; this is a key denoising step when judging cyclical stocks or turnaround stocks.

• Industry/Industrial Analysis FrameworkVolume-Price Split

  Volume-Price Attribution of Gross Margin Changes

  When analyzing gross margin resilience, the report does not broadly attribute it to 'cost control,' but breaks it down into 'price increases' (e.g., PP-R price hikes), 'cost optimization' (e.g., PE procurement), and 'structural changes' (share of high-margin products). This method helps investors identify whether profit improvement comes from temporary cost dividends or sustainable competitive advantages (such as pricing power).

• Valuation Method

  EV/GCI and CROCI Valuation Model

  Goldman Sachs' unique valuation system, where GCI (Gross Capital Investment) measures invested capital scale and CROCI (Cash Return on Capital Invested) measures capital efficiency. Compared to traditional P/E or P/B, this model penetrates accounting profit fluctuations better, reflecting the true cash flow creation ability and intrinsic value of heavy-asset or cyclical enterprises, especially suitable for manufacturing with significant capital expenditures and depreciation/amortization impacts.

Asset mapping & comparison

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

• Weixing New Materials (002372.SZ)

  Coverage target, Maintain Neutral rating

  Strengths

  Strong gross margin resilience, possessing industry-leading pricing power; rapid growth in overseas business provides a second curve; high and stable dividend payout (70-80%); healthy cash flow; continuously increasing output per household.

  Weaknesses

  Core profit declined YoY, main business profitability under pressure; dual weakness in retail and engineering channel demand; increase in SG&A expense ratio; relatively high premium over competitors may not be sustainable; 2027-28 EPS forecasts are 7% below market consensus.

  Comparison

  Domestic revenue decline (-11%) outperformed the industry average (-mid teen%); one of the few plastic pipe manufacturers to successfully raise prices this year; dividend payout ratio is at the high end of Goldman Sachs' building materials coverage.

  Risks

  Unexpected fluctuations in raw material prices; delayed home renovation demand due to insufficient recovery in consumer confidence; obstacles to cross-regional expansion; poor execution of new product cross-selling; failure of high premium strategy.

Key data

• 2Q26 Attributable Net ProfitRmb271m+72% YoY, significantly above Goldman Sachs expectations, including one-time gains
• 2Q26 Core ProfitRmb128m-17% YoY, 22% below Goldman Sachs expectations, excluding one-off items
• 1H26 Domestic Revenue Growth-11%Outperformed industry average (-mid teen%), showing share resilience
• 1H26 Gross Margin Change+1pp YoYPE price hikes and structural optimization offset raw material cost increases
• 1H26 Overseas Revenue Share9%Significant increase from 6% in FY25, Singapore/Thailand contributed 63%
• 2026E Dividend Payout Ratio Guidance70%-80%Maintained at high level, corresponding to ~5% dividend yield
• 12-Month Target PriceRmb9.0Previous value Rmb9.3, based on 12.3x EV/GCI vs CROCI

Impact & implications

The report believes Weixing New Materials is in a critical transition period of 'trading price for profit' and 'service transformation.' In the short term, core profit decline and weak demand limit the stock's upside potential, especially given the uncertainty of whether the current high premium of 30%-50% relative to the mass market can be sustained. However, the company's ability to maintain gross margin expansion, increase output per household, and maintain high dividends during the industry downturn proves its operational barriers as an industry leader and shareholder return awareness. For investors, this means the stock may lack explosive upward catalysts, but possesses defensive value akin to bonds in a low-interest-rate environment; subsequent attention should focus on the recovery of retail confidence and the implementation of municipal funds, which will be the key variables to break the current valuation deadlock.

Risks

• Unexpected large fluctuations in raw material (PP/PE/PVC) prices, accounting for about 60% of COGS
• Persistent weak consumer confidence leading to further delays in home decoration pipe replacement demand
• Execution of cross-selling for new products like waterproofing ('product + service') falling short of expectations
• Slower-than-expected expansion into lower-tier markets outside traditional advantageous regions
• Current high premium of 30%-50% relative to peers may be difficult to sustain under weak demand

What to watch

• Sustainability of second-half raw material cost inflation and product price hike pass-through
• Pull effect of consumer confidence recovery on retail PP-R and concentric circle product sales
• Status of government municipal project funding availability and progress of PE pipe sales repair
• Whether the trend of increasing output per household can continue to hedge against the decline in serviced households