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3Q22 results in line with our expectations　　Skshu Paint announced 3Q22 results: In 1-3Q22, revenue grew 0.5% YoY to Rmb7.95bn, attributable net profit rose 370% YoY to Rmb301mn, and recurring net profit was Rmb214mn. In 3Q22, revenue increased 0.5% YoY to Rmb3.24bn, and the attributable net profit was Rmb205mn, close to the upper limit of the preannouncement.　　Decoration coatings trended up; pressure on engineering coatings eased. In 3Q22, Skshu’s sales volume rose 24% YoY to 130,000 tonnes for home decoration coatings and dropped 9% YoY to 290,000 tonnes for engineering coatings. Revenue from the two segments reached Rmb753mn and Rmb1.28bn (+15% and -3% YoY) in 3Q22. Revenue from adhesive agents and auxiliary materials grew 40% and 4% YoY to Rmb171mn and Rmb485mn in 3Q22.　　Structural adjustment underway; coating prices fell slightly; GM continued to grow QoQ. As the proportion of circulation products in home decoration coatings increased, the ASP of home decoration coatings fell 14% QoQ (down 7% YoY) in 3Q22. The ASP of engineering coatings dropped 1.3% QoQ (+6.3% YoY). As raw material prices are falling rapidly, we estimate the procurement price of latex, titanium white, and auxiliaries fell 17%, 17%, and 13% QoQ in 3Q22, driving up the firm’s blended GM by 1.9ppt QoQ to 30.6%.　　Expense ratios continued to fall. In 3Q22, the selling and G&A expenses fell 9% and 6% YoY, with the blended expense ratio dropping 1.1ppt YoY to 19.5%. Specifically, the selling and G&A expense ratio fell 1.3ppt and 0.3ppt YoY to 12.3% and 4.1%, and the financial expense ratio grew 0.6ppt YoY to 1.1%. Profitability continued to rebound. The firm’s net margin grew 1.8ppt QoQ to 6.3% in 3Q22.　　Cash collection quality improved; accounts receivable stable. In 1-3Q22, the firm’s cash receipts to revenue ratio rose 7ppt YoY to 107%, and the net operating cash flow increased by Rmb586mn YoY to Rmb540mn. In 3Q22, the cash receipts to revenue ratio was 98% as accounts receivable grew Rmb340mn QoQ. In 3Q22, the payables increased by Rmb300mn QoQ, resulting in Rmb384mn of operating cash inflow in 3Q22 (+Rmb570mn YoY). Capex narrowed. In 1-3Q22, the firm spent Rmb794mn on the construction of fixed assets, with 3Q22 contributing Rmb213mn. Liabilities began to decline. As capex weakened, and cash flow improved, its interest-bearing liabilities fell around Rmb100mn QoQ, and its asset-liability ratio fell 1ppt QoQ to 82% in 3Q22.　　Trends to watch　　Developing growth drivers despite pressure; operational quality is improving. Looking ahead, we think demand for coatings from project completions will likely remain under pressure, but the firm is investing more in the retail channel to achieve win-win growth with distributors. The firm has been increasing the number of distributors for engineering projects to empower its enterprise business. It is developing non-real-estate businesses to offset the declines in real estate projects. We expect the firm’s GM to continue to rebound as raw material prices fall. Its expense ratios may continue to fall with improving HR efficiency and effective expense control. Supported by the retail business, we expect the firm’s cash flow to improve, capex to fall, and debts to decrease, achieving high-quality operations.　　Financials and valuation　　We maintain our 2022 and 2023 net profit forecasts. The stock is trading at 31x 2023e P/E. Maintain OUTPERFORM and our TP of Rmb120 (43x 2023e P/E), offering 39.6% upside.　　Risks　　Recovery of demand from project completions disappoints; home decoration paintings development disappoints.【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。