Incident Overview
The Company released its interim results report for the 2023-2024 fiscal year (ended September 30, 2023). During the reporting period, the company achieved total revenue of HK$9.152 billion, -4.0% (RMB caliber +1.3%); net profit attributable to the parent company was HK$1,136 million, +4.0% (RMB caliber +9.8%); net profit after deducting non-return from the parent company was HK$1,288 million, +9.7% year-on-year (RMB caliber +15.8%, of which non-recurring profit and loss included HK$98 million in fair value and HK$0.54 million in processing fixed assets, one-time accounts receivable and investment losses). In addition, the company plans to pay an interim dividend of HK$0.15 per share, with a payout ratio of 51.6%.
Analytical judgment:
Revenue side: Under pressure from the macro environment, the Chinese market performed well
By region: During the reporting period, the company's main business revenue in the Chinese market, North American market, European market and other overseas markets achieved main business revenue of HK$60.05, 20.37, and 532 million, respectively, with a year-on-year difference of 5.1% (RMB caliber +11.0%), -20.5% (if the impact of shipping surcharges is excluded -5.4%), and -20.6% (if the impact of the decline in iron frame business is removed, sofa revenue in the European market -8.8%). The Chinese market still achieved double-digit growth in RMB against the adverse backdrop of weak recovery in overall consumption and slow real estate restoration, showing that the company still achieved double-digit growth in RMB caliber, showing that the company still achieved a double-digit increase in RMB caliber. Domestic brand strength continues to increase, while the Chinese market's contribution to the company's overall revenue remains number one, reaching 67.2% during the reporting period, +5.7 pct over the same period, which is still a key development area for the company's business in the future; we expect that the slow recovery in European and American demand in the first half of FY2024, combined with the high interest rate environment overseas, will suppress demand for durable goods to a certain extent. North American market revenue is temporarily under pressure. Currently, the European and American markets are still the main consumer markets for functional sofas and most of them depend on imports. As the process of dewarehousing in overseas markets accelerates, demand in overseas markets is expected to recover better; Home Group revenue increased slightly by +6.7% year-on-year to HK$298 million. Channel aspect: During the reporting period, the company collaborated offline and online.
Offline channels focus on developing stores in declining markets and adding cost performance series in Tier 1 and 2 cities. During the reporting period, the company added a net increase of 417 stores in the Chinese market, with a total number of stores reaching 6888, with revenue of +6.3% (RMB caliber); online channels strengthened the promotion of the live streaming sales model, enhanced brand influence and sales growth through short video promotion, private store live streaming, and deep cooperation with leading anchors, etc., to achieve increased brand influence and sales growth, +17.5% (RMB caliber). By product: In the first half of the fiscal year of FY2024, the company's sofa revenue in the Chinese market was +7.1% (RMB caliber), and mattresses +13.3% (RMB caliber). The company continued to focus on the competitiveness of functional sofa products, thus opening up growth channels for other products and gradually moving towards becoming a leader in all software categories.
Profit side: declining costs, better cost control, improved profitability
In the first half of the year of FY2024, the company's gross profit margin and net profit margin were 39.1% and 12.7%, respectively, +0.3 pct and +0.9 pct; among them, the gross margins of the Chinese market, Europe and other overseas markets, and Home Group were +1.3 pct, +6.1pct, +6.3pct to 41.2%, 27.4%, and 28.8% respectively; while the gross margin of the North American market was affected by shipping surcharges -5.9 pct to 35.9% year on year (excluding the impact of shipping surcharges, + 5.1%). In terms of the period expense ratio: The company's cost reduction was obvious. The company's sales expense ratio, management expense ratio, and financial expense ratio were -1.9 pct, -1.1 pct, and -0.5 pct to 17.9%, 5.0%, and 0.2%, respectively.
Investment advice
The company is located in the Chinese market, which has a huge consumer base and huge potential for future growth, and there is plenty of room for development in the future; we are optimistic about the stable development of the company's domestic sales business in the medium to long term and the continued recovery and strength of the export business. Considering the continued pressure on domestic consumer demand and the uncertainty of the recovery of the real estate industry, we lowered our previous profit forecast, adjusted FY2024-FY2026's operating income from HK$207.03/238.51/272.66 billion to HK$186.73/212.38/HK$23.839 billion, respectively; and adjusted EPS from HK$0.59/0.69/0.80 to HK$0.54/0.62/0.71, corresponding to the closing price of HK$5.46 per share on November 15, 2023 PE was 10/9/8 times, respectively, maintaining the company's “buy” rating.
Risk warning
1) Demand growth falls short of expectations; 2) risk of large fluctuations in raw material prices; 3) risk of deterioration in the trade environment.