The results for the first half of the fiscal year fell short of our expectations
The company announced the results of the 2024 fiscal year report: achieving operating income of HK$8.938 billion, a decrease of 3.8%, net profit of HK$1,136 billion, an increase of 4.0%, and deducting non-net profit of HK$1,288 million, an increase of 9.7%. The performance fell short of our expectations, mainly due to the relatively slow recovery of overseas business. The company plans to pay dividends of HK15 cents per share, with a payout ratio of 51.5%. We believe that with the continued growth of the high-potential mattress category, steady growth in e-commerce, and marginal improvements in export sales, performance is expected to gradually pick up.
Development trends
1. Domestic sales bucked the trend and grew steadily, while export sales slowly recovered. 1) Domestic sales: 1H2024FY's main business revenue was HK$6.05 billion, up 5.1%, and RMB caliber increased 11.0%. Of these, sofa revenue was HK$3,881 billion, up 1.5%, revenue accounted for 64.11%, mattress revenue was HK$1,491 billion, up 7.3%, and revenue accounted for 24.57%. 2) Export sales: 1H2024FY North American market revenue was HK$2,037 million, down 20.5% from the same period, mainly due to the impact of shipping surcharges, revenue after exclusion; revenue from European and other overseas markets was HK$532 million, down 20.6%; and HG revenue was HK$298 million, up 6.7%.
2. Profit margins have rebounded steadily, and cost reduction and fee control results have been remarkable. The company's 1H2024FY gross margin was 39.07%, +0.23ppt year over year, mainly due to a decrease in raw material costs; sales expense ratio 17.95%, y-1.89ppt, mainly due to a decrease in overseas transportation and port expenses; management expense ratio 5.04%, y-1.04ppt, financial expense ratio 1.10%, year-on-year +0.44ppt. Under comprehensive influence, net profit margin was 12.71%, year-on-year +0.95ppt. We expect that the company's cost reduction and fee control effects will continue to be unleashed in the second half of the fiscal year, driving continued improvement in profit levels.
3. Offline channels continue to sink, and e-commerce platforms are blooming more. 1) Offline: 1H2024FY domestic offline channel revenue was HK$4,098 billion, an increase of 0.7%, and the RMB caliber increased by 6.3%. As of 1H24FY, the company has 6888 domestic terminal brand stores, a net increase of 417 compared to 23FY, with a closing rate of about 7.3%. 2) Online: 1H2024FY's domestic online channel revenue was HK$1,285 million, an increase of 11.3%, and the RMB caliber increased by 17.5%. The company strengthened its ability to attract e-commerce in live streaming and achieved good growth on multiple platforms. According to the company's official Weibo, during the “Double 11" period in 2023, the Chivas brand achieved a self-broadcast GMV of 450 million yuan, an increase of 53%. At the same time, it also ranked first in sales in the Tmall and JD functional sofa categories. We believe that with the company's in-depth multi-channel layout and joint efforts, revenue levels are expected to continue to pick up.
Profit forecasting and valuation
Considering the slow recovery of downstream demand, FY2024/2025 net profit was lowered by 9%/5% to HK$22.65/ 2,775 billion respectively. The current stock price corresponds to a price-earnings ratio of 9/8 times FY2024/2025, respectively. Considering profit forecast adjustments and valuation year changes, maintaining an outperforming industry rating and target price of HK$8.00, corresponding to FY2025, the price-earnings ratio is 11 times, with 47% margin of increase from the current stock price.
risks
Prices of raw materials have fluctuated greatly, real estate prosperity has declined more than expected, and overseas trade risks are at risk.