The company practices fine management and "high-quality customer" strategy, accumulates reputation through high-quality and stable delivery capacity at the same time, expands more high-quality customers, and realizes a virtuous circle. The company is expected to grow into an industry leader in the fine decoration track. Considering the further improvement of the penetration rate of fine decoration, the company has significant advantages in fine management and high-quality customers. We predict that the company's 2020-2022 EPS is 1.60 EPS 2.15 PE 2.88 yuan, and the corresponding PE is 30x/23x/17x. With reference to the valuation level of the comparable company, and based on the fact that the company has better growth and higher ROE in the next three years, we give the company a target price of 62.49 yuan (corresponding to 2020 PE 2021 39x/29x), covering for the first time and giving a "buy" rating.

Focus on batch fine decoration to create high-quality growth. Since 2004, the company has focused on and deeply cultivated in the fine decoration industry (the income accounts for more than 99%), and now has the delivery capacity of 45000 sets of fine decoration houses per year. Benefiting from industry dividends and actively developing high-quality new customers, the company's 2017-2019 revenue / profit CAGR is as high as 58% and 60%, compared with an industry average of 11% and 10% in the same period. At the same time, with fine management and selected customers, the company maintains a high profit margin (the average net interest rate in 2017-2019 is 7.9%, while the industry average is only 4.1%). The net cash flow of operation continues to be positive and grows synchronously with profits, reflecting the company's strategy of attaching equal importance to high growth and profit quality.

The penetration rate of fine decoration continues to increase, and the medium-and long-term market space is expected to reach 1.2 trillion. The residential fine decoration is the last supplier for the developer before handing over the house, facing the owner directly, and the delivery volume is large and the development frequency is high. The repeated game with the developer requires the hardcover enterprise to have stable and reliable delivery ability. at the same time, it also gives the enterprise reasonable bargaining power. In the context of the shift of real estate from incremental to stock era, developers have increased their investment in fine decoration, and the promotion of hardcover repair in the superimposed policy has led to a rapid increase in China's fine decoration penetration, from 12% in 2016 to 32% in 2019. However, compared with the overseas penetration rate of nearly 90%, there is still room for further improvement in China's fine decoration permeability. we assume that the residential sales area is stable, and the penetration rate of hardcover houses is increasing by 2.5% a year (considering the average annual increase of 2% in the past two years and the increase in the concentration of housing enterprises). Fine decoration prices increase slightly by 1% a year, and we expect the sales area / market size of fine decoration houses to reach 900 million square meters / 1.2 trillion yuan in 2024. An increase of + 25% Universe 32% over 2019. Combined with the background of the concentration of downstream real estate developers and the extreme dispersion of the decoration industry itself (only 1.15% of CR3 in 2018), it is expected that fine decoration enterprises with high service and good reputation will achieve more excellent growth.

Advantage one: fine management to build a moat, speed up turnover, improve quality and efficiency. 1) Autonomous management: the company insists on the autonomous operation of the whole process of the project, with a high proportion of self-management, reflecting that the per capita income is lower than 41% of its peers and the management expense rate of 1.3pcts is higher than that of the industry, but the high investment in independent management strengthens the control of quality and cost. In 2019, the expense rate is 4.9%, which is lower than the industry average 3.5pcts, and the per capita profit of 148000 yuan is 34% higher than the industry average. 2) standardize management and realize the standardization of labor services and construction process: adopt the mode of small teams instead of large teams, employ labor teams according to different types of work, and coordinate each team to carry out construction according to working procedures, which greatly improves the project quality and operation efficiency; and the project is divided into thousands of construction process nodes, and the management, verification and settlement are carried out according to the process. Standardized management enables efficient operation and rapid turnover. The average total asset turnover rate of the company in the past 5 years is 1.2, which is nearly 50% higher than the industry average. 3) Fine management such as autonomy and standardization build the company's moat. The company's ROE in the past five years is 22.1%, which is higher than the industry average 9.6pcts.

Advantage two: select high-quality customers to ensure healthy development. 1) previously listed companies in the industry mostly adopted the "big customer" strategy, following customer growth that pays more attention to order volume than quality, and these customers have high financing costs (more than 10%). Willing to subcontract part of the procurement to decoration enterprises to reduce their own financial pressure, so that enterprises can pursue the rapid growth of hardcover scale, but this model requires higher financing capacity, with deleveraging regulation and control in 2018. The profit margin is low and the development model of cushion procurement has encountered bottlenecks. 2) the company always insists on cooperating with quality-oriented "high-quality customers" to output fine management model and high-quality service; in the cooperation mode, high-quality customers such as Vanke have low financing costs (3%-4%) and strong collection capacity, and do not need to rely on the company for advance purchasing, which makes the company on the one hand have a higher gross profit margin (the average gross profit margin in the past 5 years is 18.3%, which is higher than the industry average 3.5pcts). On the other hand, there is no financial pressure (net debt ratio of 8.3% in the past 5 years, lower 12.9pcts than the industry average), fewer accounts receivable (47.6% of income in the past 5 years, lower 42.1pcts than the industry average), and excellent cash flow (operating net cash flow / net profit of 0.62 in the past 5 years, 59% higher than the industry average). 3) High-quality customers and fine management complement each other to build a benign business closed loop. High-quality customers have higher requirements for quality, and the control and control of the construction process can better reflect the differences, so the company's fine management and stable delivery capacity are its strong barriers, so that it can operate step by step with relatively small orders with a high return rate. While implementing fine management, the company expands more high-quality customers. In 2019, the company's revenue from customers of listed companies accounted for 80%. In the past three years, the growth rate of newly signed orders has reached 23.3%.

Risk factors: residential sales growth is not as expected; fine decoration penetration is not as good as expected.

Investment suggestion: the company forms a high-quality commercial closed loop through fine management and "high-quality customer" strategy, accumulates reputation through high-quality and stable delivery capacity at the same time, expands more high-quality customers, and realizes a virtuous circle. Considering the further improvement of the penetration rate of fine decoration, the company has more significant advantages in fine management and high-quality customers. We predict that the company's EPS in 2020-2022 will be 1.60 EPS 2.15pm 2.88 yuan, and the current price corresponding to PE is 30x/23x/17x. With reference to the valuation level of the comparable company, and based on the fact that the company has better growth and higher ROE level in the next three years, we give the company a target price of 62.49 yuan (corresponding to 2020 PE for 39x/29x in 2021), covering it for the first time and giving "buy".

Rating.