[Event] Murong Holdings released its semi-annual report: achieved revenue of 656 million yuan, an increase of 27.35% over the previous year; gross profit of 185 million yuan, an increase of 32.23% over the previous year, and the net profit of the mother was 79 million yuan, an increase of 40.17% over the previous year. The company's revenue was in line with expectations, and the profit growth rate slightly exceeded expectations.

[Review]

1) The revenue side is growing rapidly. In the field of export sales, on the one hand, the company's products are favored for their design and cost performance advantages. Orders from major customers such as Costco are growing rapidly, and product unit prices have risen due to the launch of new high-end products. On the other hand, the online business implemented by the company 17H2 developed smoothly, cooperated with 8 mainstream platforms, and enhanced pre-sales and after-sales services. In the field of domestic sales, the company currently has 4 self-operated stores, which use targeted sales to attract traffic and increase conversion rates, and quickly promote the brand through various advertisements, magazine articles, etc.

2) The profit side slightly exceeded expectations. ① The gross margin increased by 1.0pct to 28.2%, mainly due to prominent scale effects and a decrease in the cost of leather raw materials. ② Expenses were slightly pressured during the period. The sales expenses ratio increased by 0.6pct to 6.9% (increased marketing expenses and retail store rents), and the management expenses rate increased by 1.2pct to 8.3% (increased acquisition-related expenses and consulting expenses). ③ Other revenue increased from $040 million to $28 million due to an increase in fair value income from convertible loans and revenue from the sale of raw materials. However, the reduction in excess deductions for R&D expenses caused the income tax rate to rise. Taken together, the net interest rate increased by 1.1 pct to 12.1%

3) Growth will continue to be strong in the future. ① Production capacity: Murong Center is expected to start construction within the year, and 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 order volume of major customers continues to increase, and we regularly participate in exhibitions to expand customer resources. In the medium to long term, the company has acquired channels of US retailers all over the US and East. The company can further cultivate the local retail network, enhance its brand power, and increase its voice. ③ Domestic sales: The sofa industry is booming, and the company will gradually implement the store layout. Currently, 8 dealers have been confirmed, and 4 companies have signed contracts of intent. ④ Trade war: Companies can withstand the impact of the trade war by building a factory in Cambodia (under construction) and transferring burdens to customers. The devaluation of the RMB is also helpful.

Investment advice: The company's EPS is expected to be 0.21/0.27/0.35 yuan in 2018-2020, and the corresponding PE is 6.2/4.8/3.8X. As a leading exporter of sofas, the company has sufficient growth momentum, attractive valuations and dividends (dividend rate over 4%), and maintains recommended ratings.

Risk warning: real estate sales fall short of expectations; trade war brings uncertainties