Henglin Co., Ltd.: Endogenous and epitaxial diversifies product categories, and cross-border e-commerce sets sail. Henglin was founded in 1998 and is deeply involved in the office furniture export business. Driven by endogenous epitaxial extension, the product category has expanded from office chairs to upholstered furniture, system office, custom furniture, and new material flooring.
In anticipation of interest rate cuts, existing housing sales in the US are recovering and inventory digestion is expected to resume growth in 2024; the company's traditional foundry business revenue is expected to resume growth in 2024; starting in 2020, the company will actively cultivate independent brands, and cross-border e-commerce revenue is expected to continue to grow rapidly; with the acquisition of Yongyu Home in 2022, the increased penetration rate of new material flooring will drive the expansion of demand in the European and American markets, and Yongyu is expected to increase the company's performance.
Traditional OEM: With the US furniture boom and high quality customer resources, the OEM business is expected to recover. In 2018-2022, China's office chair export value CAGR was 9.7%, of which the United States is the largest exporter. Under the influence of overseas inventories, after excluding Yongyu's merger, traditional foundry revenue in 2022 and 2023H1 declined 5.8% and 13.1% year-on-year, respectively. Looking forward to the future: Expectations of US interest rate cuts are increasing, existing home sales are expected to pick up. Combined with the furniture category's own replacement cycle and inventory digestion, the US furniture consumption boom is expected to improve. Since the second half of 2023, China's office chair exports have been corrected year on year; at the same time, the company will gradually increase the supply of categories to major customers such as Ikea and continue to develop new customers, etc., and traditional foundry revenue is expected to resume growth from 2024.
Independent brands: Take advantage of cross-border e-commerce dividends and actively cultivate independent brand business. The company's OBM business includes three segments: LO System Office, Doctor Chef, and Endogenous Independent Brands. 2023H1 OBM accounts for 37.6% of revenue, of which endogenous independent brands account for 15.8% of revenue. ① Endogenous independent brands: team+product+brand+warehousing+logistics+systems, etc., cross-border e-commerce is expected to continue to grow rapidly. In 2022, the company's online revenue was 1.04 billion yuan, an increase of 57.4% over the previous year. In 2022, the company reorganized the e-commerce team, while enriching the product categories (office chairs, massage chairs, sofas, lift tables, etc.), building a multi-dimensional brand matrix (NOUHAUS positions high-end, and other brands focus on cost performance), warehousing and logistics (self-built overseas warehouses), and various system advantages, cross-border e-commerce is expected to continue to expand rapidly. ② LO System Office: In 2019, the company acquired the Swiss office system brand LO, which ranked first in the industry with a 25% market share, and is expected to maintain steady growth. ③ Dr. Chef: In 2021, the company acquired Dr. Chef's custom furniture business, and the overall scale is expected to stabilize.
New material flooring: The acquisition of Yongyu Home Furnishing is expected to increase the company's performance. The advantages of PVC flooring are outstanding, and the increase in penetration rate is driving the expansion of the US market. In 2018-2022, China's PVC flooring export value CAGR was 7.9%. In 2022, the company acquired Yongyu Home Layout's new material flooring business. 2023H1 Yongyu contributed 19.1% and 36.3% of Henglin's revenue and profit respectively. Yongyu focuses on the main business of new material flooring, continues product research and development, binds high-quality customers, and lays out the three major production bases in Zhejiang, Hunan, and Vietnam, and is expected to continue to enhance the company's performance.
Profit forecasting and valuation. We forecast that in 2023-2025, the company's net profit to mother will be 452, 554, and 666 million yuan, respectively. The year-on-year growth rates will be 28.1%, 22.6%, and 20.2%, respectively, and the corresponding PE will be 14, 11, and 9 times, respectively. Under the comparable company valuation method, Henglin Co., Ltd. was given 15 times PE in 2024, corresponding to a market value of 8.6 billion yuan (39% market capitalization space), covered for the first time, and given a “buy” rating.
Risk warning: Overseas market demand recovery falls short of expectations; cross-border e-commerce business development falls short of expectations.