According to FY23H1, the company announced that revenue performance was in line with expectations and profit performance exceeded expectations: achieved revenue of HK$9.299 billion, yoy -9.1%, net profit of HK$1,092 million, yoy +10.5%; due to strict considerations, the company set aside HK$84.53 million in management expenses in advance for the US Raffel patent lawsuit. After restoration, the company deducted HK$1.13 billion of net profit from the parent company, yoy +14.4%. Dividend: FY23H1 dividends HK15 cents per share.

Domestic sales: Affected by the pandemic and the downturn in real estate, there has been a decline, actively opening up new traffic entrances and driving the channel to sink. Due to the impact of the pandemic on inbound passenger flow and logistics transportation, the decline in real estate affected demand for new homes. FY23H1 achieved domestic sales revenue of HK$5.775 billion, YOY -11.6% (excluding iron frames was HK$5.341 billion, YOY -7.9%). FY23H1's domestic sales business reached HK$4.187 billion offline, YOY -9.7%, online HK$1,155 million, YOY -0.9%; sofas reached $3.835 billion, YOY -11.5%, mattresses reached $1,506 million, and YOY +2.8%. FY23H1 opened stores steadily, driving domestic sales growth, and achieved a net opening of 262 stores (including sofas and mattresses) and closing 254 stores. As of 2022.9.30, the total number of stores was 6,230 (excluding the consolidated table of Style Home and Prini stores). The company actively explores traffic channels through live e-commerce, and is deeply involved in trade-in demand to hedge against the downturn in real estate. New stores are gradually penetrating into low-tier cities, driving channels to sink. It is expected that FY23H2 will maintain the H1 store opening rate.

Export sales: In a complex external economic environment, FY23H1's export revenue remained flat, showing resilience. FY23H1 North America achieved revenue of HK$2,564 million (including iron frames), yoy +0.1%; Europe and other regions achieved revenue of HK$670 million, yoy +2.1%; Home Group achieved revenue of 279 million yuan, yoy -39.9%, mainly affected by the Russian-Ukrainian war, which declined significantly. In a situation where there is great uncertainty in the overseas macro environment, the company's export sales are still flat, and orders are still quite full, showing resilience. It is expected that FY23H2 sea freight will fall, and prices will drop after overseas inventory is cleared in the early stages, further stimulating demand growth.

Profit side: Benefiting from lower raw material costs and sea freight charges, as well as internal quality and efficiency improvements, profit margins have improved markedly. The gross profit margin of FY23H1 domestic sales (including iron frames) was 39.9%, an increase of 4.2 pct over the previous year, mainly due to ① the decline in raw material costs, where steel, leather, and chemicals were -8.5%/-0.5%/-15.8%, respectively; ② the internal promotion continued to improve quality and efficiency, and intelligent transformation reduced labor costs; ③ the proportion of mattress categories with high gross margins increased. FY23H1 accounted for 26.4% of domestic sales revenue, +3.5pct over the previous year. The gross profit margin of FY23H1 export sales (including iron frames) was 37.6%, -0.1pct over the previous year, while the gross margins of North America and Europe plus others were 41.8% and 21.3% respectively, +0.7pct and -2.9pct over the same period last year. The gross margin of export sales to North America increased year on year, mainly due to a decline in sea freight charges, but during the period when freight rates rose, some trade terms were revised to FOB prices, so there was limited room for gross margin increase. The sales/management/finance expense ratio of FY23H1 was 19.8%/6.1%/0.7%, respectively, compared to +0.1pct/+0.9pct/+0.3pct. The slight increase in the sales expense ratio was a 24.9% increase in labor costs and expenses, accounting for an increase of 1.2pct to 4.5pct in revenue. We believe that as the company's digital transformation accelerates, retail system construction, and refined operation levels increase, there is room for further decline in the long-term expense ratio. FY23H1 benefited from factors such as obvious improvements in quality and efficiency, and a decline in raw material and freight costs. The company's net interest rate to the parent was +2.1pct to 11.8% year-on-year, and profit margin improved markedly.

Domestic sales promote digital transformation and dealer empowerment, continue to cultivate internal skills, and functional sofas have entered a window where the penetration rate of functional sofas has accelerated, which is expected to further open up market space. After experiencing a high-speed showroom period, the company will further optimize internal efficiency and empower dealers, comprehensively build a store management system, increase the number of experiences, customer unit prices, and conversion rates, and promote the improvement of the quality of single-store operations. In terms of categories, the focus is on large single functional sofas, and categories such as mattresses are being expanded horizontally, which is gradually driving growth. In terms of internal management, open sources save money, reduce costs and increase efficiency, and promote intelligent transformation to save labor costs on the manufacturing side. Short-term shipping costs and raw materials have reached a downward price inflection point. Combined with the company's overseas factories climbing up the slope and improving efficiency, the profit elasticity of the export business will become apparent. Considering the impact of the FY23 pandemic on domestic demand and logistics delivery, we lowered the company's FY2023-2025 net profit to HK$25.08/27.83/3,065 million (previous value was HK$2,683/31.52/3,771 million), FY2023-2025 net profit of FY23 YOY 12%/11%/10%, corresponding to the current PE of 11X/10X/9X. The company's valuation has fallen to a low level, real estate support policies such as short-term property insurance and bond financing have been strengthened, and there is plenty of room for future valuations to recover upward, and purchase ratings have been maintained.

Risk warning: The epidemic affects offline passenger traffic and logistics; the international situation is turbulent; the launch of the store management system falls short of expectations.