Founded in 2002, Three Trees (603737. SH), which launched its "20-year strategic plan" last year.
Judging from the latest financial statements (Q3 2023), after experiencing the "labor pains" of the market in 2021, 3Trees, the year of the weak crown, finally started from 2022, not only getting rid of the adverse effects of the real estate market, but also by optimizing the product structure and channel structure, the return on net assets, gross sales margin and sales net profit margin have all climbed to a new high in the past three years. In addition, net cash flow reached an all-time high, creating a "three-tree sample" of "counter-cyclical" growth in the current economic environment.
The industry expects that with the stable growth of small B-end + C-end after channel optimization, the increase of industry concentration, and the clearing of adverse effects brought by real estate, 3Trees, the first brand of national coatings, will return to the track of rapid growth.
In addition, the architectural coatings track naturally has the gene of "bull stocks", with high valuation in overseas markets, large market capitalization leaders, and three trees whose stock prices are at the bottom of history, and there is huge imagination space.
The demand for stock is gradually emerging, and 3Trees is making efforts in the small B-end and C-end markets
According to the World Paints & Coatings Industry Association, the global coatings market size will be around $185.5 billion in 2023. From the perspective of global regional distribution of coatings, Asia-Pacific, Europe and North America are the leading regions for the development of the global coatings industry. China is the world's largest coatings market, with a total output of 26.9108 million tons in the first three quarters of 2023, a year-on-year increase of 4.7%.
For a long time, with the rapid development of the real estate industry, China's architectural coatings account for the largest proportion, reaching 36%. In recent years, the real estate industry has been in trouble, and the paint industry as a whole has been greatly affected. As a result, the performance of key domestic leading coating/waterproof companies, including 3Trees and Oriental Yuhong, has been dragged down.
In terms of channels, 3Trees has made great strides into small B channels and C-end channels.
Traditionally, the big B channel, that is, the continuous real estate centralized procurement project, has a large amount and many projects. The small B channel is a relatively scattered regional real estate, office building, hospital, municipal and other projects, as well as home improvement and complete decoration companies. The C-end channel is the end consumer demand through the retail channel.
According to brokerage estimates, under the new pattern of the real estate industry, in 2022, the domestic large B, small B and C-end architectural coatings market space will account for 8%, 40% and 52% respectively. In other words, the small B and C sides occupy an absolute position.
After two years of operation, as of H1 2022, the number of 3Trees Small B customers has increased from 4,998 in 2020 to more than 20,000, which is four times that of 2020. The revenue of small B business has also increased from less than 100 million yuan in 2013 to 3.84 billion yuan in 2022, with extremely rapid growth.
Nowadays, in the B-end business structure of 3Trees, the proportion of non-real estate business has increased significantly, and the impact of the large B-end cycle has been greatly reduced, so that the real estate industry can quickly turn around and return to the track of high growth when it is facing difficulties.
Next, 3Trees plans to lay the layout of Small B to first- and second-tier cities in an orderly manner. It is expected that in the future, the customer volume and revenue scale of the small B business will reach a new level and become a new performance growth engine.
In the past two years, the country has continued to promote the construction of new urbanization, and policy opportunities such as infrastructure projects, old city renovation, urban renewal, affordable housing construction, and rural revitalization will continue to drive the demand for coatings and building materials.
The most recent policy is in March 2024, when the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Trade-in" (hereinafter referred to as the "Notice"), which clearly stated that it is necessary to "focus on the construction of new urbanization, combined with the promotion of urban renewal and the transformation of old communities, focusing on residential elevators, water supply, heating, gas supply, sewage treatment, sanitation, urban lifeline projects, security, etc., and promote the renewal and transformation by category". In addition, the "Notice" also made details on promoting the replacement of home improvement consumer goods: "through government support, corporate concessions and other ways, support residents to carry out local renovation of old houses, kitchens and bathrooms", etc.
During the two sessions this year, the government work report also emphasized the need to steadily implement urban renewal actions. Earlier, in 2023 and 2022, from the central to the local government, a series of policy documents on the renovation of old houses and old communities were also launched, such as the "Notice on Solidly Promoting the Renovation of Old Urban Communities in 2023" issued by the Ministry of Housing and Urban-Rural Development and other departments in July 2023, which is a major vane of the industry.
Combined with this environment, 3Trees sank to the county-level track and grasped the C-end retail market.
Specifically, it has adopted the strategy of "surrounding the city from the countryside", establishing a flat system in the third and fourth tier cities, and building a channel moat. According to Hong Jie, Chairman and President of 3Trees, 3Trees currently has 200,000 outlets across the country, and its high-quality products have entered thousands of households.
The "Stay Now" service is one of the killer features of 3Trees, and "3Trees, Stay Now" is almost deeply rooted in the hearts of the people. It is understood that by January 2024, 3Trees' immediate living business has covered 300+ cities across the country, with 700+ service providers and 250,000+ users.
In terms of online channels, 3Trees is deeply involved in mainstream e-commerce platforms such as Taobao and JD.com, as well as emerging e-commerce channels such as Douyin. As of the beginning of 2024, the number of followers of 3Trees, JD.com and Taobao has surpassed that of traditional foreign brands such as Nippon, and it is a veritable No. 1 brand of national paints.
The founders have not reduced their holdings after eight years of listing, and the employee stock ownership coverage reaches 30%
After 20 years of development, 3Trees has become a mature and diversified industry leader. Especially after the listing in 2016, the company has transformed from a single paint manufacturer to a comprehensive service provider of "paint + service consulting + construction services", and has promoted and deployed "live now" services across the country, and the product line has been continuously enriched.
Since then, 3Trees has continued to expand its product lines and expand its business scale through organic development and mergers and acquisitions. In terms of mergers and acquisitions, in 2019, 3Trees acquired Dayu Jiuding and began to develop waterproof business. In 2021, it acquired Fidelity New Materials and Magm, and entered the field of green building materials, energy-saving and thermal insulation materials.
3Trees said that it will be committed to building a one-stop integrated system of green building materials integrating "interior and exterior wall coatings, waterproofing, thermal insulation, industrial coatings, flooring, new household materials, Kiev materials, and construction services" in the engineering field, and create a "seven-in-one" product of latex paint, art paint, beautiful countryside, adhesives, Kiev materials, waterproof coatings, Komori boards, and a better life solution for immediate living services in the retail field. After years of accumulation and efforts, the company's revenue has increased significantly from less than 2 billion in 2016 to 11.3 billion in 2022.
What is even more commendable is that, unlike many executives of listed companies who are keen to reduce their holdings and cash out, Hong Jie, the founder, actual controller and chairman of 3Trees, has not reduced his holdings in the eight years since the company went public in 2016. As of the third quarter of 2023, Hong Jie's personal direct shareholding ratio reached 67.02%.
At the same time, since 2017, 3Trees has led the launch of the first phase of the equity incentive plan and the fifth phase of the employee stock ownership plan to ensure the annualized rate of return of employees' own (self-raised) funds at least 6%/10%. Under the guidance of the company's development prospects and the practical actions of the senior management, the proportion of the share capital of the employee stock ownership plan has also increased step by step, of which the share capital of the fifth phase of the employee stock ownership plan has reached 3.44%, which fully demonstrates the confidence of the actual controller and the company's employees in the company's development prospects.
According to statistics, most of the current executives of 3Trees hold shares of the company, and the proportion of employee shareholding coverage has reached 30%. As of Q3 2023, the top ten shareholders hold 85.52% of the shares.
Affected by the overall environment of the capital market, the current employee stock ownership plan has suffered a floating loss recently, but considering the relevant statements in the company's announcement, for employees, it is at least equivalent to buying a high-interest wealth management product.
More importantly, with 3Trees' performance returning to the track of rapid growth, the stock price is on the way to dance with the performance. This can also be seen from the continuous entry of institutions to "buy the bottom".
In the first quarter of 2023, Huabao Ecological China Hybrid Securities Investment Fund under Huabao Fund became a new shareholder of 3Trees; in the third quarter, BNP Paribas and Chinese Insurance Products became newly elected as a shareholder of 3Trees; and two funds under Invesco Great Wall increased their holdings by more than 3.6 million shares compared with the 2022 annual report.
(New and overweight institutions in Q3 2023)
The underlying logic of large institutions' interest in the company is consistent with the company's employees, that is, they are optimistic about the company's performance.
According to the third quarterly report, despite the slowdown in macroeconomic growth and the adjustment of real estate policies, the adjustment of 3Trees' business strategy and sales channels has achieved results. In the first three quarters of 2023, the company achieved operating income of 7.947 billion yuan, a year-on-year increase of 18.4%, and net profit attributable to the parent company of 301 million yuan, a year-on-year increase of 84.4%. On the whole, since the company's listing, its operating income has maintained steady growth, and only in 2022 it will decline slightly due to the economic environment. According to the performance of the first three quarters of 2023, it is almost a foregone conclusion that 3Trees' revenue and net profit will increase significantly year-on-year in 2023.
The industry pattern has changed, and the industry leader has reaped the greatest dividends
There are many manufacturers in the early stage of the development of the domestic coating industry, and the overall competition pattern of the industry is relatively scattered, large but not strong, complete but not excellent.
According to the list of "Top 100 Global Coating Companies in 2023" released by "Tujie", the number of Chinese companies on the list has decreased, with a total of 26 companies on the list.
However, as the Coating Standards Committee continues to improve the standards of coating products, and at the same time, consumers' diversified needs for green environmental protection and other properties have forced coating companies to accelerate the research and development of multi-functional coating products, and the industry threshold has gradually increased. In terms of product standards, 3Trees, as a national paint leader, has a full right to speak.
According to the company's financial report, as of the third quarter of 2023, 3Trees has participated in the formulation of 103 national, industry and other standards. Now the company has nearly 700 authorized patents, developed more than 30 first-class confidential formulas, published 127 papers, and was approved as a national intellectual property demonstration enterprise in 2022.
This is due to the fact that 3Trees attaches great importance to research and development. According to the data, in 2021 and 2022, the company's R&D investment will reach 270 million yuan and 260 million yuan respectively, and it is expected to exceed 300 million yuan in 2023.
3Trees said that at present, the pattern of coatings and building materials is undergoing profound changes, and high-quality, green and low-carbon development has become the theme of the industry. The domestic coating industry is still in a period of important strategic opportunities, and the growth momentum of the industry is more diversified and the development potential is huge.
According to the Prospective Industry Research Institute, the development of the mainland coating industry has gone through three stages.
Before 2010, the national policy mainly focused on supporting the development of the industry, and in 2009, the "Guiding Opinions on the Structural Adjustment of the Petroleum and Chemical Industry" and other policies were introduced to raise the entry threshold for coatings, establish access systems or standards, and limit the disorderly expansion of low-end products.
In the decade from 2011 to 2020, the policy began to focus on the development of industry standards and promote green coating products. In particular, the State Council's "Three-Year Action Plan for Winning the Blue Sky Defense War" requires that the construction and production of solvent-based coatings with high VOCs content in key areas are prohibited.
Since 2021, the industry has entered a stage of high-quality development, and the "14th Five-Year Plan" has promoted the green proportion of the coating industry and promoted the use of low-volatile coatings. Home improvement users have also increased their requirements for practicality, quality, aesthetics, etc., and objectively raised the industrial threshold.
Huayuan Securities said that the domestic paint enterprises represented by three trees are not far behind foreign brands, in addition to thousands of small enterprises in the industry with little investment, poor equipment, and profit from the production of low-quality and low-cost products, but the living space is narrowing day by day, and will gradually withdraw from the market.
From the perspective of the global industry coating industry pattern, according to the data of "Tu Jie", the global CR10 is about 50%, of which the United States, Japan, South Korea, and Germany are 93%, 95%, 95% and 90% respectively, and China is only 30%, with great potential for concentration improvement.
In the process of increasing market concentration and small and medium-sized brands being eliminated from the market, industry leaders such as 3Trees, which occupy advantages in technology, products and channels, are expected to enjoy the biggest dividends.
On the whole, with the remarkable results of 3Trees' channel optimization, the impairment provision that affected the performance has also been completed, especially the real estate risk has also been basically cleared, and the company's negative effects in terms of products, channels, finance, and market environment have been exhausted. With remarkable results in product and channel optimization, 3Trees has successfully entered a new development cycle.
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