Export-oriented enterprises started with a single category of OEM. In the long run, expanding categories and private brands are the two most important paths for them to reach a new platform. Henglin is a leading company in these two areas.
Macro: In 24, the US may enter a cycle of interest rate cuts. Real estate recovery will drive up demand for commodities in the post-real estate cycle.
Perspective: 1) Inventory perspective: US household channel inventories began to decline in Q2 in '22, and fell to the middle of nearly 5 years by October '23. Channel vendor confidence is restored in anticipation of a recovery in demand, and the market is expected to enter an active inventory replenishment cycle. 2) Manufacturing perspective: Leading companies rely on capital advantages to build factories in Vietnam to avoid high tariffs (US Customs imposes 25% tariffs). As Vietnam's supply chain is gradually improved, the cost advantage of leading enterprises is expected to be highlighted, and their market share will increase rapidly. 3) Channel perspective: Overseas e-commerce penetration rate increased (from 7.4% in 2015 to 19.7% in '22), and high-quality enterprises have the opportunity to bypass channel giants to directly reach consumers and build their own brands.
Micro: 1) The company accounts for a high share of exports (76.88% of overseas revenue in '22), and the US is its largest overseas market (accounting for more than 40% of revenue from the US), which is expected to benefit from US real estate recovery and dealer inventory replenishment. 2) The company continues to acquire and acquire around the household strategy. The various business segments appear to be independent, but they can actually empower each other. 3) The company began to set up a factory in Vietnam in 2018, which can meet the production of traditional office chairs, sofas, massage chairs and PVC flooring for Yongyu Home, reducing the impact of global trade risks on the company. 4) The company actively seizes online opportunities and incubates its own brand through cross-border e-commerce channels. The company's online channel (i.e. private label) is expected to account for 20% of revenue in 2023.
Investment advice: The company started with OEM, but it did not stop at OEM. The traditional business is on the one hand, buying raw material companies to extend the industrial chain, and on the other hand, building overseas factories to improve manufacturing capacity and order response speed. On this basis, mergers and acquisitions improve the strategic layout of large homes on the one hand, and incubate private brands through the rise of cross-border e-commerce.
The company is no longer a simple foundry, but a home furnishing enterprise that spans the entire industrial chain and is involved in front-end raw materials, mid-end manufacturing+ channels, and back-end services, and an upward channel has been opened. We expect the company's net profit to be 4.39/5.44/694 million yuan in 23-25, corresponding to EPS of 3.16/3.91/4.99 yuan, and the corresponding valuation is 15.5/12.5/9.8 times. First coverage, giving a “buy” rating.
Risk warning: The US consumer market falls short of expectations, brand expansion falls short of expectations, global trade risks.