Event: Minhua Holdings released its FY2024 interim results report. The company achieved revenue of HK$9.152 billion in the first half of FY2024, a year-on-year decrease of 4.0%; net profit of HK$1,136 million, an increase of 4.0% year-on-year. The company plans to pay a final dividend of HK$0.15 per share, maintaining a high payout ratio of 51.6%.
Domestic channels are diversified, and export sales growth is worth looking forward to
By region, the Chinese market, the North American market, Europe and other overseas markets achieved revenue of HK$60.05, 20.37, and 532 million in the first half of the year of FY2024, respectively, up 5.10%, -20.54%, and -20.6% year on year, accounting for 70.03%, 23.76%, and 6.20%; sales in the North American market were under slight pressure, excluding shipping surcharges, which affected revenue by about 5.40%. Among them: 1) Chinese market: Looking at each channel, as of September 30, 23, the company actively laid out offline channels, with a net increase of 417 to 6888 stores (excluding style, Pliny) from the end of FY2023, and maintained a low closing rate of 7.30%. At the same time, the company had a first-mover advantage in both traditional e-commerce and live e-commerce, continued to develop new traffic channels and enhance brand influence through live e-commerce, etc.; 2) North American market:
The North American market is the company's main battleground for going overseas. After more than a year of improving inflation, the US gradually removed high inventories, and demand for functional sofas is picking up. The company continues to expand market channels, with production capacity, quality and cost advantages, and is expected to further expand market share; 3) European and other overseas markets: The company is gradually improving its product line layout to meet the requirements of newly expanded customers with diverse product styles.
Sales in the domestic sofa category are growing steadily, and the penetration rate of functional sofas is expected to accelerate by category. In the first half of FY2024, the company's sofas and accessories, bedding and ancillary products, other products, and Home Group businesses achieved revenue of HK$61.77, 14.91, 9.07, and HK$298 million respectively, up -7.92%, 7.32%, 6.68%, and 6.71% year-on-year. Excluding the Home Group business, the total sales volume of FY2024 sofa products in the first half of the year was about 882,000 sets, up 16.98% year on year. Among them, the number of sofa sets sold in China increased from 419,000 to 43.5 million, an increase of about 27.60% year on year, and the number of sofa sets exported and sold increased 3.70% year on year. According to Euromonitor International data, China's functional sofa market penetration rate is expected to be 7.2% in 2022. Compared with the US market penetration rate of 49.4%, there is still plenty of room for improvement. As the company continues to empower dealers to improve the level of terminal marketing and focus on improving the competitiveness of functional sofa products, it has launched a product matrix with more diversified sofa sizes and shapes to push domestic functional sofas into the fast track of development.
Profitability continues to pick up, and a high percentage of dividends continues to be paid back to shareholders
In terms of profitability, the company's overall gross margin for the first half of the FY2024 fiscal year was 39.1%, an increase of 1.8 pct over the previous year. It is expected to be mainly related to falling raw material costs, product restructuring, and improving the quality and efficiency of the company's internal management. The average unit costs of the company's main raw materials leather, iron frame, wood products, chemicals, and packaging materials during the reporting period were -14.4%, -15.7%, -22.4%, -4.4%, and -6.3% year-on-year, respectively. In terms of net interest rate, the company's net interest rate for the first half of the FY2024 fiscal year increased by 7.6pct to 12.7% year on year.
In terms of period expenses, the share of the company's sales and distribution expenses in the first half of the FY2024 fiscal year decreased by 9.6 pct to 17.9% year on year; the share of administrative expenses decreased by 18.0 pct to 5.0% year on year.
The company continues to pay a high percentage of dividends to shareholders. In the first half of the FY2024 fiscal year, the company declared a total dividend of 15.0 HK cents per share, with a payout ratio as high as 51.6%.
Investment advice: As a leader in the functional sofa industry and a leader in upholstered furniture, Minhua Holdings has solid fundamentals. High dividends continue to give back to shareholders, and the company's fine management capabilities have steadily improved, and domestic and foreign sales have gradually recovered. We continue to be optimistic about the company's long-term investment value potential.
We expect the company's FY2024-FY2026 main business revenue to be HK$186.59, 210.14 and HK$23.686 billion, up 4.89%, 12.62%, and 12.72% year on year; net profit of HK$22.92, 25.77 and 2,818 billion, up 1.98%, 12.43%, 9.35% year on year. The corresponding PE is 9.1x, 8.1x, and 7.4x, giving FY24 11.90xPE, with a target price of HK$7.85, maintaining a buy-A investment rating.
Risk warning: The impact of fluctuations in the epidemic exceeds expected risks; domestic sales development falls short of expected risks; risk of large fluctuations in raw material prices and exchange rates.