Key points of investment
Established in 1999, Ellie Home is one of the earliest domestic enterprises engaged in the production of PVC flooring.
In 2020, Ellie Home was officially listed on the A-share main board of the Shanghai Stock Exchange, becoming the first stock in the PVC elastic flooring industry. The company has been incorporated into the supply chain system of world-renowned home building materials supermarkets such as HOME DEPOT, and has established stable supply relationships. The company mainly increased 25.96% year-on-year in Q1-3 in 2023, and the growth rate far exceeded that of its peers.
The penetration rate of PVC flooring continues to increase, and the post-cycle boom in US real estate is expected to drive demand.
1) PVC flooring is a significant alternative to traditional floor decoration materials. The LVT penetration rate in the US market rapidly increased from 3.77% in 2012 to 28.03% in 2022, while the structural share of other floor materials such as carpets continued to decline, and LVT rapidly increased its market share due to its excellent performance and high cost performance. 2) The post-cycle boom in US real estate is increasing, and demand for downstream inventory replenishment is expected to increase. The expectation that the Federal Reserve will cut interest rates in 2024 has increased significantly, and mortgage interest rates are expected to gradually fall. At the same time, judging from the inventories of various departments, manufacturers/wholesalers are ahead of retailers. The year-on-year inventory growth rate of manufacturers and wholesalers is already at a historically low position. Although retailers' inventory growth rate has not fallen to a historically low level, it has turned upward. It is expected that external demand will gradually improve.
The company is the core supplier of Home Depot and is expected to benefit from the increase in business scale brought about by order transfers. 1) Profit levels have rebounded: As raw materials and shipping costs and the exchange rate of RMB against the US dollar declined, industry profits continued to recover. Previously, the company's gross margin fell from 23.72% in 2019 to 3.42% in 2022, and 2023Q3's gross margin recovered to 22.78% in a single quarter. 2) Increase in revenue scale:
Since companies in the same industry, such as Haixiang New Materials and Tianzhen Co., Ltd., were all subject to traceability inspections by the US Customs, the scale of business declined sharply. The company began building a production base in the US in 2021. At present, the North American production base has basically been completed. Trial production has begun, and production and operation will be gradually put into operation; in July 2023, the company plans to establish a new subsidiary in Mexico and invest no more than 30 million US dollars to further improve overseas delivery capacity, or benefit from the transfer effect of overseas customers to expand the scale.
Profit forecast and investment rating: The company has been deeply involved in PVC flooring for many years, has established stable partnerships with internationally renowned flooring traders and brand VERTEX, and has been incorporated into the supply chain system of world-renowned home building materials supermarkets such as HOMEDEPOT. As the overseas real estate boom increased and the downstream gradually began the inventory replenishment cycle, the impact of low raw material prices, shipping prices, and RMB exchange rate factors decreased, and the company's profit level gradually recovered. We expect the company's net profit for 2023-2025 to be 0.75/136/192 million yuan, corresponding EPS of 0.31/0.57/0.80 yuan/share, respectively, and corresponding PE of 30X/17X/12X respectively. Considering the company's production capacity layout and high performance flexibility in North America, the first coverage gave it an “increase in weight” rating.
Risk warning: risk of fluctuations in raw material prices, risk of exchange rate fluctuations, risk of US trade policy, risk of high customer concentration.