A global leader in functional sofas, everyone's home is beginning to take shape. The company has been deeply involved in functional sofas for more than 20 years. It is a leading global functional sofa company, ranking first in global sales for 5 consecutive years. The domestic market share has reached about 60%, and it is in the top three among US manufacturers. The company's business performance is steady, focusing on functional sofas, and actively promoting diversification and expansion of categories. The total revenue of FY2018-FY2023 increased from HK$10.391 billion to HK$17.789 billion (corresponding CAGR of 11.4%), net profit increased from HK$1,536 billion to HK$1,915 billion (corresponding to CAGR of 4.5%); FY2024H1 achieved total revenue of HK$9.152 billion (-4.0% YoY, RMB Caliber +1.3%) and net profit of HK$1,136 billion (+4.0% YoY, RMB Caliber +9.8%).
Functional sofas have low penetration and high growth, and mattress track growth dividends still exist. 1) Functional sofas: China's functional sofa market is in a dividend period of low penetration and high growth. The domestic market size in 2020 was 8.78 billion yuan (2014-2020 CAGR was 12.8%). Currently, the penetration rate is less than 10%, and there is still plenty of room for improvement. The functional sofa market in China is relatively concentrated, and the company's domestic market share has reached about 60%. It is expected that it will fully enjoy the dividends of increasing category penetration. 2) Mattresses: China is a major consumer of mattresses. In 2011-2020, mattress consumption increased from 4.7 billion US dollars to 8.54 billion US dollars (CAGR is 6.9%). With the advent of the era of soft home stocks and the improvement of residents' healthy sleep attitudes, the increase in penetration rate+the shortening of replacement cycles have jointly driven an increase in mattress stock replacement demand. The competitive pattern of the mattress industry is scattered. Leading companies create products with both quality, functionality and cost performance, and are optimistic that their market share will gradually increase.
Domestic sales: The channel continues to expand, and the value of consumer brands is highlighted. On the product side, the company focused on the core product functional sofa and expanded to categories such as household beds, mattresses, and custom furniture. The category expansion results were remarkable. The revenue CAGR of the FY2018-FY2023 bedding/iron frame business was 41.8%/16.4%, respectively. On the channel side, the company's channel sank and accelerated, refined management empowered efficiency, and the efficiency of single-store operations was superior to that of peers; online traffic trends were actively grasped, and new retail was increased. The Chivas brand led the online market share, and the e-commerce channel performed beautifully. On the production side, the company accelerated the integration of the industrial chain, achieved complete self-research and production of core components such as iron frames and motors, and comprehensive cost control created a deep moat.
Export sales: Demand in overseas markets is picking up, and the global layout is increasing its share. Export sales performance in fiscal year 2023 was hampered by macro factors. Currently, overseas customer inventories have reached the bottom, and the peak overseas season has spawned demand for inventory replenishment. It is expected that the pace of customer orders will continue to improve, and the revenue side is expected to improve steadily from month to month. Furthermore, the company continues to improve its overseas supply chain layout, and its market share is expected to increase further.
Profit forecast and rating: In the 2024-2026 fiscal year, the company's operating income is expected to increase by 12.0%/13.4%/13.4% year on year to HK$194.27/220.30/24.984 billion, and net profit of net income increased 23.4%/14.4%/14.6% year on year to HK$23.63/27.02/3,095 billion, corresponding to PE 8.5x/7.5x/6.5x. For the first time coverage, a “buy” rating is given.
Risk warning: risk of fluctuations in raw material prices, store development falling short of expectations, real estate market repair falling short of expectations, export sales recovery falling short of expectations, risk of assumptions and calculation errors.