Main points of investment:

High-quality software household leader from the beginning of functional sofa

The company takes the internal and external sale of the functional sofa as the main business, prospectively carries on the integrated layout of the functional sofa industry chain, the core components of the iron frame motor are self-developed and produced, constantly carry out product innovation and iteration, and the cost-effective functional sofa achieves the software household leader. The company has deepened its domestic sales layout in the past three years, its profitability is stable under the changing external environment, and its past performance is far better than that of the industry.

Multi-category + whole-house customization to meet the long-term trend

We estimate that the total potential demand for sofas in China will be about 50 million sets in 2020. Under the long-cycle perspective, the use cycle of the sofa is shortened, the stock replacement will constitute the main driving force of market growth, and the consumption attribute is becoming more and more significant. Functional sofas have more advantages than ordinary sofas. We estimate that at present, the market share of middle-and high-income families in China is only 12%, and there is much room for improvement in penetration. The mattress industry has grown faster than the sofa in recent years, and the industry still has room to rise in volume and price under the long-term background of the rise of the sleep economy. The software leader represented by Minhua creates the second growth curve of mattress business with the advantage of sofa flow. With the continuous improvement of the influence and concentration of the head brand, the deep integration of the industrial chain and the continuous landing of the concept of everyone's residence has become a long-term trend. Software home leader with the layout of the whole house customization to enhance competitive advantage.

Marketing channels are becoming more and more perfect.

After the company has mastered the manufacturing technology of the core components, we will create a full range of cost-effective sofas.

After successfully creating the brand image of Zhihuashi, the company expands sofa matching and mattress products, marches into the whole family customization, and gradually moves towards the direction of everyone's residence. The channel side actively arranges third-and fourth-tier cities, opening new super first-class experience stores, large retail stores, whole customized stores, and VR and CRM systems actively empower dealers. The brand image is young, comfortable and fashionable, which is in line with the characteristics of the functional sofa in the introduction period. The reform of channel and marketing will help the company's retail terminal to fully tap the passenger flow, improve the conversion rate, increase the customer unit price, and create good conditions for the rapid growth of domestic sales performance after the impact of the epidemic is eliminated.

Earnings forecast, valuation and rating

We estimate that the revenue of the company's FY2023-25 is 193.25 FY2023 227.58 / 26.906 billion yuan, the net profit of return to the mother is 22.17max 25.75 / 2.984 billion yuan, the EPS is 0.57 pound 0.66 pound 0.76 yuan per share, and the corresponding PE is 14x/12x/10x. Combining the absolute valuation method and the relative valuation method, the reasonable valuation range of the company is HK $13-14, covering the "buy" rating for the first time.

Risk tips: repeated risk of epidemic situation; risk of rising raw material prices; lower-than-expected risk of channel development, etc.