Events: The company released its 2023 three-quarter report. The first three quarters achieved revenue of 9.744 billion yuan, +3.33% year-on-year; net profit of 1,151 million yuan, -24.99%; net profit from net income of 1,151 million yuan, -24.99%; net profit deducted from non-return mother was 1,184 billion yuan, -27.26% year-on-year.

Comment:

Q3 Revenue resumed steady growth, and profits were under pressure due to multiple factors. Looking at the single quarter, 2023Q1/Q2/Q3 achieved revenue of 32.46/ 31.57/33.40 billion yuan, +4.53%/-0.65%/+6.15% over the same period; achieved net profit of 4.53/4.13/284 billion yuan, -10.25%/-24.16%/-41.30% year-on-year, Q3 resumed steady growth on the revenue side in the context of a weak overall consumption environment, and the results of digital transformation gradually became apparent; however, due to the company's own increased investment in digital platforms during the period, and The profit side is still under pressure due to factors such as increased rental costs. It is expected that in the future, with the resumption of passenger flow and the company's digital transformation, the company is expected to unleash strong profit elasticity.

Profitability declined year over year due to short-term strategic resource investment. The company's gross margin for the first three quarters of 2023 was -10.91 pct to 35.00% year on year. We believe it was mainly due to the company's intelligent business expansion and the increase in rental costs; the company's expense ratio was relatively stable during the first three quarters of 2023. Among them, the sales/management/development/financial expense ratio was +0.35/-0.21/+0.31/-0.40pct to 9.75%/4.12% /0.46/ 8.56%, respectively. Under the combined influence, net profit margin for the first three quarters was -4.71pct to 12.05%. Looking at a single quarter, the company's gross profit margin for 2023Q3 was 30.75% (y-14.44pct, month-on-month -4.42pct), and the net profit margin was 8.63% (y-7.08pct, month-on-month -4.70pct).

The “hole” is gradually gaining strength, and the “AIGC” application is worth looking forward to. The company uses “Dongwo” as the core to build a digital home industry service platform. The 2023H1 company “Dongwo” achieved overall platform transactions (GMV) of 39.55 billion yuan, +411.3% year-on-year. By the end of 2023H1, “Dongwo” had launched 557 stores, 68,000 merchants and 5.796 million products, with promising future development prospects. The company increased the capital of the participating company “every flat, every house” during the reporting period. After the capital increase was completed, the company's shareholding ratio increased from 40% to 52.86% to become its controlling shareholder. It is expected that in the future, the resources accumulated by each house designer and the AIGC application (Lingtu) created by the company will collaborate more deeply with the company's home furnishing stores, “caves” and self-operated home improvement platforms to help the company's digital transformation and upgrading and revenue growth.

Investment advice: Short-term management is under pressure, and digital transformation helps growth. Considering the progress of consumer recovery and the company's strategic investment in the company's digital platform, we adjusted the company's profit forecast. The company's net profit for 2023-2025 is estimated to be 17.93/20.89/2,384 billion yuan (original value: 1,903/22.17/2,529 billion yuan), corresponding to the current market value PE, 12/11/9 times, respectively, maintaining the “buy” rating.

Risk warning: Commercial housing sales fluctuate, consumption recovery falls short of expectations, and store development falls short of expectations.