Description of the event
The company released FY2024H1 results (April to September 2023), and achieved main income/net profit of HK$1,136 million during the period, of -4%/+4% over the same period, with a year-on-year increase of 2%/10% respectively under the RMB scale.
Incident comments
Revenue: The recovery in domestic sales in FY2024H1 is resilient. Export sales are under pressure but may have recently recovered to a positive increase.
1) Domestic sales business: H1 furniture business also increased 3% (same increase of 9% under RMB), with online growth even better.
There was a net increase of 417 brand stores to 6888 during this period. Looking at the furniture business by category, sofas and accessories/mattresses and accessories increased by 1%/7% (same increase of 7%/13% under RMB) respectively. Among them, mattresses achieved resilient growth, sofa sales volume/average price were +28%/-16% (RMB caliber), and product restructuring in line with consumer trends boosted sales volume growth; other H1 products (iron frames, customization, etc.) increased 27%.
2) Export sales business: H1 overall decreased by 18% (same 8% after excluding the impact of shipping surcharge revenue in the previous period), with North America/Europe and other markets/Home Group (HG) -21%/+7% year-on-year respectively (North America also fell 5% after restoring the above impact). Furniture sales in the North American market were resilient during the period, and growth gradually resumed after dewarehousing was completed. It is estimated that the monthly growth rate at the end of H1 had recovered to a better level; European and other markets also showed a recovery trend. The monthly revenue growth rate during the period may have changed from negative to positive. If the H1 decline was narrowed to 9% after excluding the iron frame business.
Profitability: Reduced raw material prices, falling shipping costs, etc. drive profit improvement. The apparent gross margin of FY2024H1 improved by 0.3 pct, while the year-on-year improvement in comparable caliber gross margin after reducing the impact of the previous period's shipping surcharge earnings will be even greater. Looking at each region, it is estimated that H1 China, Europe and other markets, and HG gross margins have all improved, and the North American market is also estimated to have increased year-on-year after recovering the above impact. The improvement in gross margin was mainly due to a decrease in raw material costs (H1 also decreased by 7%). The average purchase price of iron frame/leather/wrapping paper/chemical/wood chipboard/calico also fell 16%/14%/6%/2%/22%/4% during the period. The H1 sales/management expense ratio was also reduced by 1.9/1.0pct, with overseas transportation and port expenses also reduced by 43%. With improvements on the cost and cost side of H1, H1's apparent net interest rate rose by 1.0pcts (the improvement will be even greater under the RMB caliber), but after recovering from losses, the improvement in non-net interest rates will be obvious.
Follow-up outlook: 1) Domestic sales: In an environment where low fluctuations in real estate sales are compounded by rational consumption, it is expected that the company's domestic sales will continue to grow resilient. The company focuses on strong product strength and brand power. While enjoying the dividends of increasing the penetration rate of functional sofas in terms of categories, it is also cultivating potential businesses such as mattresses (developed as an independent division) and customization; 2) Export sales: The improvement trend is expected to continue. Among them, the company's own advantages in manufacturing, supply chain, and production capacity continue to be realized, compounded by the low base of FY2023H2, and the certainty of FY2024H2 acceleration is strong.
The company is building high barriers in brand/product/supply chain, and strengthening competitiveness through design, marketing and channel transformation, and is optimistic that it will continue to increase its share in the software industry. This year, the company re-organized and optimized the product line and brand matrix to adjust the product structure in line with consumer trends; at the same time, it emphasized the refined operation of stores on the channel side, continued to strengthen the layout of multi-traffic entrances such as live broadcasts and cross-industry alliances, promoted the growth of same-store growth, and laid a good foundation for long-term development. In FY2024-2026, the company's net profit from the parent company is estimated to be HK$22.9/25.9/2.97 billion, respectively, and the corresponding PE is 9/8/7 times, maintaining the “buy” rating.
Risk warning
1. Real estate sales fell short of expectations; 2. The positive trend in external demand was disrupted; 3. The company's channel expansion and operation fell short of expectations.