Matters:

The company released its three-quarter report for 2023. 23Q1-3 revenue is 1.63 billion/ -23.3%, net income is 178 million/-53.2%, not 132 million /-33.1%; 23Q3 revenue is 650 million/-9.8%, net income is 93.67 million/ -63.3%, net income is 73.24 million/ -14.4%.

Commentary:

Report on the short-term impact of the Senkawa divestment. Excluding the influence of Qianchuan, it is estimated that 23Q1-3 revenue is -9% /-4% year-on-year, and the sharp decline in net profit for Q3 alone is mainly due to investment income due to the divestment of Qianchuan last year, so Q3 is not -63.3%/-14.4%.

The retail channel is under pressure, and the volume is growing rapidly. Excluding the influence of Qianchuan's presentation, 23Q1-3 direct management/distribution/bulk channel revenue was 0.53/13.74/122 million yuan, yoy -15.6%/-13.65%/+101.33%, gross profit margin of each channel 54.3%/38.5%/13.6%, yoy-0.56/+2.53/-2.61pcts; looking at the channel layout, there were 1915/14 distribution/directly managed stores at the end of 23Q3, a net change of +126/-14 from the beginning of the year. It is expected that with the Q4 peak season support+low base+large household strategy progressing steadily, the retail channel growth rate is expected to recover; on the engineering side, the customer structure is clearly defined, with central enterprises and state-owned enterprises as the core, and high-quality private enterprises as the core.

Benefiting from the large household strategy and bulk volume, the steady increase in kitchen cabinets. Excluding the influence of Qianchuan, 23Q1-3's overall wardrobe/ cabinets/wooden doors/finished products/doors and windows revenue was 12.12/2.02/0.60/0.72/0.03 billion yuan, yoy -10.9%/+9.5%/-0.5%/-18.5%/-87%, corresponding gross margin for each category was 40.25%/27.94%/22.79%/7.32%, yoy+1.08/-0.7/+1.18/ -3.46/+30.65pcts.

23Q3 gross margin increased, and cost investment increased. The 23Q1-3 gross profit margin was 36.5% /year over year +0.5 pct, and the sales/management/R&D/finance expense ratio was +2.7/+0.9/+0.8/+0.3 pcts to 12.9%/6.3%/5.6%/1.6%. Overall, cost investment increased. The 23Q3 gross profit margin was 37.4% /year over year +1.8 pcts/month over +1.3 pcts, the sales/management/R&D/financial expense ratio was +2.4/+0.2/+0.7/+0.2 pcts to 11.7%/4.8%/5.6%/1.3%, and the comprehensive 23Q3 net profit margin increased 2.7 pcts month-on-month from 23Q2.

The major housing strategy and channel development are progressing steadily. It is expected to gradually improve in 24 years and maintain the “push” rating.

Overall, after the divestment of Hubei Qianchuan, the company's profitability may continue to be optimized. In the future, it will focus on the core strategy of “new paradigm+large household”, enrich the product matrix, and increase the penetration rate of extended categories. Considering the comprehensive performance of the first three quarters, we expect net profit from the mother in 23-25 to be 257/303/350 million yuan (the original value in 23-24 was 365/426 million yuan), and the corresponding PE is 13/11/10X. Referring to the relative valuation method, 17 times PE for 23 years, giving a target price of 14 yuan, maintaining a “strong push” rating.

Risk warning: The macroeconomic downturn affects demand, changes in the competitive landscape, receivables risk, etc.