DCC - 3Q24: Stiff competition weakens profit

3Q24 net profit was Bt249mn, down 15.7% YoY and 7.4% QoQ, pressured by a drop in revenue of 12.4% YoY and 8.7% QoQ on a 11.5% QoQ and 16.2% YoY fall in tile sales volume to 9.2mn square meters. Behind this was stiffer competition from imported tiles, particularly low-end (red body) tiles from China and India, and a decline in domestic demand caused by a sluggish real estate market and high household debt. However, DCC's strategy of focusing on larger-sized and porcelain tiles led to a 2.9% QoQ and 4.5% YoY increase in ASP in 3Q24. Gross margin also improved to 40.2% in 3Q24 from 39.7% in 2Q24 and 39.0% in 3Q23 on a shift to higher-margin products and increased solar rooftop installations that helped reduce electricity costs, despite a slight increase in gas prices in 3Q24.

Outlook to improve in 4Q24. 9M24 net profit accounted for 66.1% of our full-year forecast and we see a small downside to our full-year forecast. We do expect 4Q24 net profit to recover somewhat, as 4Q and 1Q are the peak season for tile buying. Additionally, we anticipate some demand for repairs following the recent floods in the northern region, although we have not yet seen a significant increase in demand. There is a possibility that low-end tile sales will increase, leading to a slight decline in overall gross margin in 4Q24. The company's strategy continues to focus on reducing production costs and promoting porcelain tiles, which have higher margins than standard-sized tiles.

Dividend yield 4.3% annualized, XD November 19. DCC’s board has approved a quarterly dividend of Bt0.02/share, 73% dividend payout on 3Q24 or 4.3% annualized yield.

Update on share buyback program. As of August 30, DCC has paid Bt27.7mn to purchase 14mn shares at an average price of Bt1.98/share, out of a total repurchase budget of ~Bt500mn (not exceeding 250mn shares, 2.74% of the total number of issued shares). The program runs from August 13, 2024 to February 12, 2025. We believe this may provide some support to share price when it declines.

Valuation & Recommendation. We maintain our Neutral rating as we still expect a slight recovery in 4Q24 due to the buying season and additional demand from post-flood repairs. However, the market remains concerned about increasing competition, particularly from imported tiles from China and India. Our TP of Bt1.80 is based on -0.5 SD of its five-year PE mean of 12.8x.

Key risks. Changes in purchasing power, higher costs from inflationary pressure. Key ESG risks are energy management, sustainability products, and high greenhouse gas emission.