FY24H1 Domestic sales have recovered, North America has gone to Cuba, and demand for inventory replenishment has driven the recent correction of export orders:
The company's revenue for the period was -4% YoY to HK$8.94 billion, and net profit was +4% YoY to HK$1.14 billion.
(1) Domestic sales: FY24H1 Chinese market revenue +5% year-on-year to HK$6 billion (RMB +11%).
In terms of volume and price, sales of sofas during the period were +28% year-on-year to 530,000 sets. The decline in ASP was due to the launch of cost-effective products, increased marketing activities, and channel development in low-tier cities. By category, domestic sales of sofas/beds achieved revenue of HK$38.9/1.49 billion, with RMB caliber of +7.1%/+13.3%, respectively; by channel, offline/online sales revenue of domestic sales was HK$41.0/ 1.29 billion, respectively, and +6.3%/+17.5% of RMB caliber. In terms of stores, domestic sales increased net sales from 417 stores to 6,888 during the period, with a closing rate of 7%.
(2) Export sales: FY24H1 North America/Europe and other/HG revenue was HK$20.4/5.3/ 30 billion, respectively, -21%/-21%/+7% year-on-year; excluding the impact of the sharp decline in shipping charges, the North America/European market revenue was -5.4%/-8.8%, respectively. During the period, sales of sofas in North America were positive, +4.4% year over year to 287,000 sets.
Looking forward to the future: (1) Domestic sales are mainly driven by volume growth. It is expected that 600 new stores will be added in the second half of the fiscal year, and the target of 10,000 stores will remain unchanged in the next 3-5 years to reach the sinking market; a rebate channel support policy was adopted this year, and it is expected that this policy will continue next year to stabilize dealer profitability. We estimate that 10 years from now, the annual stock replacement demand for domestic sofas will reach 24 to 30 million sets (see text). As the penetration rate of functional sofas increases, only stock replacement demand is calculated, there is 2-3 times more room for annual sales of domestic sofas in the medium to long term than at present. (2) The export trend is optimistic - the removal of warehouses in North America is coming to an end. Since the second half of the year, export orders have turned positive, showing a trend of improvement month by month. Increased demand for inventory and improved shipping costs will drive growth.
The decline in raw material costs and the decline in shipping costs have boosted profitability:
Raw material costs were -7% year-on-year during the period (average unit cost of leather/steel/wood/wrapping paper/chemical/calico -14%/-16%/-22%/-2%/-4%), and shipping costs -43%. Overall gross margin was +0.2pp to 39.1% yoy, with gross margin in the Chinese market +1.3pp to 41.2% yoy, and North American gross margin +5.1% yoy after excluding the impact of shipping charges. The sales/management expense ratio was 17.9%/5.0%, -1.9pp/ -1.0% yoy, respectively, and the net profit margin was +1.0pp to 12.7% yoy.
Maintain your buying rating with a target price of HK$7.00:
Our view: We are optimistic about Minhua's long-term growth potential. There is still plenty of room for improvement in the penetration rate of functional sofas in domestic sales, and demand for stock replacement will gradually increase; export sales are coming to an end, the order inflection point is now there, and restorative growth can be expected. Revenue from FY24E to 26E is expected to be HK$187.1/207.7/22.95 billion, +7.9%/+11.0%/+10.5% year-on-year, respectively; net profit of HK$22.8/26.0/ 2.88 billion, respectively, +19.1%/+13.8%/+10.9% year-on-year. Maintain the buying rating, with a target price of HK$7.00, corresponding to FY25E PE 11 times.