Key points of investment
The company announced that this round of targeted additional distribution was approved by the Securities Regulatory Commission. The targeted additional distribution plan raised 800 million yuan for the second phase of the home furnishing industry project in Qumei, Henan (planned to raise 350 million yuan), the production capacity upgrade project of the Ekornes Norwegian factory (210 million yuan), repayment of loans and supplementary working capital (240 million yuan).
The fixed increase is expected to reduce the company's interest-bearing debt by supplementary cash. Interest expenses are expected to reduce the size of the company's interest-bearing debt by 3.25 billion yuan (RMB) as of 23Q3, a slight decrease from Q2. Q3 interest expenses were 77.39 million yuan. Due to global interest rate hikes, overseas floating interest rates were higher, and interest expenses increased year-on-year. The fixed increase includes loan repayment and additional working capital of 240 million yuan, and the company's book cash balance of 638 million yuan as of Q3 plus the 23-year profit statement is currently under pressure, but the operating cash flow performance is still relatively steady. We expect that with the fixed increase in 24 years, the company is expected to repay some overseas high-interest rate bonds, freeing up profit margins.
Promoting the construction of the Qumei Science and Technology Innovation Industrial Park is expected to optimize report quality. The company and China Science and Technology Asia Pacific will jointly build the 140,000 square meter Qumei Science and Technology Innovation Industrial Park. Taking advantage of the Chinese Academy of Sciences platform advantages, the Qumei Science and Technology Innovation Industrial Park will soon introduce domestic digital design software development companies, intelligent manufacturing and new energy vehicle support enterprises such as automotive lidar, etc. It is estimated that through a two-year incubation period, the overall output value of the park will reach 1.5 billion yuan. If successfully implemented, this project is expected to contribute to stabilizing cash flow and optimizing the quality of company reports in 24 years.
Ekornes: Marginal profitability restoration is determined, waiting for demand to improve Q1-Q3. The overseas subsidiary Ekornes achieved revenue of NOK 3,095 billion (same below), or -19.7% year-on-year, of which Q3 achieved revenue of 950 million, -15.8% year-on-year, and continued marginal recovery (23.7%/-18.3% respectively for Q1-Q2). Look at each brand:
1) Stressless: 23Q1-Q3 achieved revenue of 2,312 billion dollars, -19.15% year-on-year, of which Q3 was -21.0%. Demand has been under pressure due to high inflation in Europe and the US since '22. The pressure on Stressless as Ekornes's main brand is obvious, but the company supports the business through a strong product matrix such as supporting products and an extensive and efficient distribution network.
2) IMG: 23Q1-Q3 achieved revenue of 600 million dollars, -23.17% year-on-year, of which Q3 was +2.6% year-on-year, and resumed growth. On the one hand, the product was relatively cost-effective, and the demand performance was good under the downward trend in overseas consumption. On the other hand, the company's Thai factory supply began to accelerate.
3) Svane: 23Q1-Q3 achieved revenue of 183 million, -13.58% year-on-year, with Q3 -8.47% year-on-year. Products such as mattresses have gradually begun to be marketed under the Stressless brand, and we look forward to increasing numbers.
Gross profit margin: Q3 Ekornes's gross profit margin was 67.32%, +3.3 pct month-on-month, -0.6 pct year-on-year. On the one hand, the inventory of high-priced raw materials was gradually digested (Q3 inventory was 864 million, down from the end of Q2). On the other hand, the company launched the Focus 23 program in early '23 to control costs and ensure future profitability. The contribution of related measures gradually became apparent in Q3.
Profit margin: Q3 Ekornes EBIT has a net profit margin of 9.7%, Q1-Q2 is -2.7%/-1.7%, respectively. Performance improvements have been verified. We expect that along with the optimization of shipping charges and high-priced inventory, profit levels are expected to continue to recover, and the release of 24-year results can be expected.
Domestic brands: The brand renewal strategy is progressing steadily. After 23 years of gradual recovery, the company upgraded its brand on the basis of all categories and one-stop services to meet consumers' demand for the same space and multiple functions, and on the other hand, strengthened online content asset construction to create popular products around “Qumei Lab”. The “Dundun Sofa” market performed well, and is expected to gradually contribute to increased performance in 24 years.
Profit forecasting and investment advice
We expect to achieve revenue of 43.5/50.1/5.65 billion yuan in 23-25, respectively -10.32%/+15.07%/+12.77%, respectively. Performance was under pressure due to multiple adverse factors in '23. We expect the company's net profit to be -180 million yuan in '23, and is expected to achieve net profit of 238./3.9 billion yuan in 24-25, corresponding to PE 14/8X in 24-25, maintaining a “buy” rating.
Risk warning
Raw material prices fluctuate, overseas demand recovery falls short of expectations, and investment in science and technology innovation parks falls short of expectations