Key points of investment
Q3 performance fell short of expectations, mainly because the US furniture business dragged down 23Q1-Q3 companies to achieve revenue of 3.755 billion yuan (+1.0%) and net profit of 416 million yuan (+6.2%); Q3 alone achieved revenue of 1,298 million yuan (-2.8%) and net profit of 132 million yuan (-22.2%). The performance was lower than expected. We expect the Lexington business in the US to decline significantly in a single quarter, and marketing expenses in the main home textile industry have expanded.
Domestic home textile business revenue is steady, and cost investment has increased
The main home textile industry is expected to grow steadily, and franchise and group purchases are under relative pressure. As a leading domestic home textile leader, Rollei has a perfect brand matrix and channel structure. We expect this year's revenue to achieve steady growth under a low base. Among them, 23H1 home textile revenue increased 6.4% year on year. We expect Q3 to maintain this trend. Looking at each channel, based on the year-on-year revenue trend of various channels in the first half of the year, we expect a steady online recovery but not yet returned to the level of 21; the direct sales base is the lowest, and the growth rate is expected to be the highest based on recovery in store efficiency plus rapid store opening, and it is expected that franchisees are more cautious in placing orders and picking up goods; and group buying and selling is still expected to be quite far from '21 due to the corresponding procurement budget cuts by major customers in the past two years.
The gross margin of home textiles continued to rise, and sales expenses increased a lot in a single quarter. The gross margin of Q1-Q3 was +2.1 pp to 44.7% year on year, and Q3 alone was +1.9 pp to 43.1% year on year. We expect it to be mainly driven by an increase in the gross margin of the home textile business. The company adheres to the strategy of promoting the brand, and continues to improve the quality and price of its products. However, the Q3 sales expense ratio was +3.54pp. We expect that in addition to being dragged down by the US business, it will also be affected by the accelerated opening of domestic stores and the early deployment of Double Eleven marketing resources.
Fluctuations in Lexington's furniture business in a single quarter are a drag
Based on the steady performance of the home textiles business, we expect the single Q3 performance fluctuations to be mainly due to the Lexington furniture business in the US, and we expect the decline on the profit side to be greater than the revenue side. The main basis for judgment is that demand in the furniture market declined after the US real estate cycle ended. We expect Lexington to face pressure such as falling orders, inventory removal discounts, rising employee costs after inflation, and rigid cost leverage.
Inventory removal results are good, and the quality of operation is healthy
At the end of Q3, the company had an inventory of 1.45 billion yuan (-11.4% year-on-year), and the domestic home textile business and the US furniture business had good inventory removal results. With the completion of the Nantong Smart Industrial Park project, the company's rapid response capacity in the supply chain will be further enhanced.
At the end of Q3, the company had notes and accounts receivable of $4.7 billion (+0.7% yoy), Q1-Q3 net operating cash flow of $593 million (+312% yoy, net current ratio: 143%), and the repayment capacity and cash flow situation were healthy.
Profit forecasts and investment suggestions:
The company's offline store opening policy remains positive (23H1 new opening/net opening of 176/30 stores, expected to open stores faster in the second half of the year than in the first half of the year), franchisee confidence is gradually recovering. Combined with the good start of Double Eleven Tmall pre-sales, we expect Q4 and future performance to remain steady. Considering Q3 performance fluctuations, we lowered our full-year profit forecast. We expect revenue of 54.3/60.0/66.1 billion yuan for 23-25, a year-on-year increase of 2.3%/10.4%/10.2%, net profit of 6.0/6.8/760 million yuan, a year-on-year increase of 4.1%/13.9%/12.4%, corresponding to PE 14/12/11 times, the company's steady growth, outstanding high dividend attributes, and maintaining a “buy” rating.
Risk warning: raw material prices fluctuate greatly, e-commerce platform growth bottlenecks, and store expansion falls short of expectations