The company released its 2023 interim report. In the first half of the year, the company achieved operating income of 5.66 billion yuan, a year-on-year decrease of 18.64%; net profit of 151 million yuan, a year-on-year decrease of 85.30%; net profit after deducting non-return net profit of 90 million yuan, a year-on-year decrease of 90.37%.

The company released its 2023 mid-year report. 23H1 achieved operating income of 5.66 billion yuan, a year-on-year decrease of 18.64%; net profit of 151 million yuan, a year-on-year decrease of 85.30%; net profit after deducting non-return net profit of 90 million yuan, a year-on-year decrease of 90.37%; the company's single Q2 achieved operating income of 3,043 million yuan, -1,503% year-on-year; net profit of 0.5 billion yuan, -98.53% year-on-year; net profit of non-homogenized income -126 million yuan, -127.38% year-on-year.

Expense investment has increased, and profitability is under pressure. 23H1 achieved a comprehensive gross profit margin of 59.69%, a year-on-year decrease of 2.65pcts; a net interest rate of 2.13%, a year-on-year decrease of 11.90pcts. 23H1's overall expense ratio was 45.20%, up 10.57 pcts year on year; sales, management, R&D, and finance cost rates were 10.71%/11.87%/0.17%/22.45%, respectively, +2.10/+3.07/-0.20/+5.60 pcts. Looking at a single quarter, 23Q2 achieved a comprehensive gross profit margin of 59.59%, a year-on-year decrease of 3.58pcts; a net interest rate of -2.12%, a year-on-year decrease of 11.71 pcts. 23Q2 The company's overall expense ratio was 48.54%, up 15.23pcts year on year; sales, management, R&D, and finance cost rates were 11.47%/12.47%/0.14%/24.45%, respectively, +2.51/+5.26/-0.19/+7.65pcts.

The impact of rent relief during the pandemic has not been eliminated, and various businesses are still in a declining range. The company's self-operated shopping mall 23H1 achieved revenue of 3.377 billion yuan, a year-on-year decrease of 18.7%, and a rental rate of 85.7%. This is mainly due to the fact that the shopping mall was affected by macroeconomic fluctuations and the company's rent-free policy introduced in the second half of 2022.

The managed shopping mall 23H1 achieved revenue of 1,077 billion yuan, a year-on-year decrease of 16.9%, and an average occupancy rate of 87.7%, mainly due to pre-project brand consulting and entrustment management, annual brand consulting and entrustment management, and reduced revenue from commercial consulting fees and investment commission projects.

The number of stores has been structurally adjusted, and the development of a sinking market has accelerated. By the end of the 23H1 period, the company operated 91 self-operated shopping malls (net decrease of 3 in half a year), 281 outsourced shopping malls (net decrease of 3 in half a year), 8 strategic cooperative shopping malls, and 54 franchised home building materials projects (net decrease of 3 in half a year), including a total of 465 home building materials stores/industrial streets (net decrease of 11 in half a year), covering 219 cities in 30 provinces, municipalities and autonomous regions. The total operating area of shopping malls was 22,203,216.77 square meters (decrease within half a year) 305,074.23 square meters). The company expanded its shopping mall network in low-tier cities through a management and franchise model. Five new stores were added in Xingtai, Taizhou, Lianyungang, Yan'an and Zhuhai during the reporting period, achieving rapid penetration into low-tier cities.

The shareholder structure has been optimized, and business collaboration has ushered in development opportunities. The company introduced C&D Co., Ltd. and its subsidiary Lianfa Group in June 2023. The shareholding ratios were 23.95% and 6.00% respectively, making them the company's controlling shareholder and indirect controlling shareholder. C&D Co., Ltd. and the company have strong synergy in the supply chain and real estate business. It is expected that the two sides will continue to promote each other and achieve common achievements in the future, which will bring new development opportunities to the company. Furthermore, endorsements by state-owned enterprises are also expected to reduce corporate financing costs, expand credit lines, and improve operating effectiveness.

Profit forecasts and investment recommendations. The company is a leading national home decoration and furniture mall operator in China. It continues to implement the “light assets and heavy operation” decision, and its basic market continues to be stable. However, due to weak demand in the real estate chain, compounded by losses from changes in fair value of investment real estate and other impairment losses as a drag on the company's profitability, the company is expected to achieve net profit of 6.9/78/850 million yuan in 2023-2025, respectively, -7%/+13%/+8%, respectively. The current stock price corresponds to PE of 30x, adjusted to a “increase in holdings” rating.

Risk warning: Risk of fluctuation in the real estate market, risk of channel expansion falling short of expectations, and risk of performance falling short of expectations.