Key points of investment:
Sofa exports have steadily ranked among the top three in the country, and their competitive advantage is outstanding. The US sofa industry is recovering and continues to rely on imports. China's exports account for more than 50% of US imports. Although export competition is fierce, profits are low, and small and medium-sized manufacturers are under pressure, competitive advantages such as leading sofa products and production capacity are obvious, and market concentration needs to be increased. As a leading sofa exporter (the company's US revenue accounts for 90%), Murong Holdings targets young people, focuses on fashion & intelligence, and digs deep into the moat with excellent design, cost-effective competitive advantages, and brand strength and stable customer resources brought about by the transformation of OBM. The company's performance was impressive, with revenue of 1.20 billion yuan in 2017, net profit of 160 million yuan, and net profit CAGR of 47.8% in 2013-2017.
The impact of the trade war is limited, and many measures have been taken to counter the risks. The US released a list of additional tariffs, and the sofa sector is under pressure, but Mu Rong has taken many measures to deal with it: ① sofas require high skill requirements for workers, China's industrial chain is mature, and export substitutability is low; ② the continued devaluation of the RMB digests some of the effects; ③ the company invests and builds factories in Cambodia, which can change the place of origin; ④ the company has strong bargaining power after transforming OBM, which can pass on tariff risks to customers in the US.
Future highlights: Orders from major export customers are growing steadily, and domestic sales can be expected to develop. 1) Production capacity: Murong is building the Murong Center and the Cambodian factory. Production capacity is expected to increase 1.5-2 times within 2 years, laying the foundation for rapid growth. 2) Export sales: In the short term, the main source of growth was the increase in order volume from major customers. Specifically, with the transformation of OBM and the launch of new products, the unit price of the product increased by mid-single digits; with regular exhibits+e-commerce development, customer resources continued to expand. Looking at the medium to long term, the channels of acquired American home retailers spread all over the US East, making it easier for Mu Rong to cultivate the local retail network, enhance brand power, and increase pricing voice. 3) Domestic sales: The sofa industry is booming (medium to high single-digit growth rate), the space is vast (estimated to exceed 70 billion in 2018), and the company is gradually implementing store layout and expanding e-commerce business.
Profit forecast and rating: It is estimated that Murong Holdings' net profit for 2018-2020 will be 2.10/2.74/348 million yuan, EPS will be 0.21/0.27/0.35 yuan, and the corresponding PE will be 7.1/5.5/4.3X. As a leading exporter of sofas, the company has sufficient growth momentum, and its valuation and dividends are attractive (dividend rate exceeding 4%). For the first time, it covered a recommended rating.
Risk warning: Real estate sales fall short of expectations; trade wars bring uncertainties.