Key points of investment
Leading office chair export company, when cross-border e-commerce sales are underway
Henglin Co., Ltd. was founded in 1998 and successfully listed in 2017. It is a leading domestic health seat developer and currently one of the largest domestic office chair manufacturers and exporters. After listing, using the capital market platform, the company began a global layout and diversified business expansion, including Lista Office, Yongyu Home, Anhui Xinnuo, etc. In addition, the company established a team to continue to develop cross-border e-commerce business. With continued diversified expansion and cross-border e-commerce business volume, the company's revenue increased from 2,318 billion yuan to 6.515 billion yuan in 2018-2022, with a CAGR of 29.5%; net profit to mother increased from 171 million yuan to 353 million yuan, with a CAGR of 19.9%.
Cross-border e-commerce is booming, and now is the right time for light manufacturing to go overseas.
Currently, Amazon is the core leading platform in the industry, but in recent years, emerging e-commerce platforms such as Temu, SHEIN, and TikTok have had a certain impact on traditional e-commerce platforms such as Amazon and eBay. There is still room for improvement in e-commerce penetration in the long term. According to eMarketer, the global e-commerce market penetration rate was 18.9% in '22, which is expected to reach 19.5% in 23, and will increase steadily in the future, reaching 23.5% in '27. In terms of categories, light industry is an advantageous category for Chinese cross-border e-commerce sellers. It is also a key category for mainstream e-commerce platforms and current e-commerce platforms such as Temu and TikTok to go overseas. Along with Chinese platforms going overseas, light industry manufacturers are expected to fully benefit.
Henglin cross-border e-commerce: the layout of the entire industry chain, building the ultimate cost performance ratio.
Organizational team: Henglin's cross-border e-commerce business started in '19. It has experienced many stages of development of proxy operation, independent operation, and multi-channel operation. The overall operation is steady. Behind this, in terms of organizational strength, the company uses core employee shareholding methods (the main operating entity holds 70% of the shares), fully decentralized operation team operations, and the core operators act as the general manager of the subsidiary. For example, Zhejiang Hengjian has a total share of 10.25%.
Product selection & core model: Focus on successful explosions, and the increase in single products drives the scale effect. The core idea of the company's product selection is to select the top and verified core products from the Best Sellers, reduce sales prices through supply chain advantages, and achieve a high net interest rate for individual products with cost performance ratio. The company's core brand Meiya sold 131,700 BestSeller products in December, with a total of 61 SKUs and an average sales volume of 2,160 units. The high monthly sales volume guaranteed a large-scale effect of single products.
Supply chain: Global production capacity layout, rich categories to support the expansion of cross-border e-commerce business. Currently, the company has production capacity layouts in China, Vietnam, and Switzerland, and has upstream and downstream manufacturing capabilities for the main categories of home furnishings. Currently, due to the large variety of products involved in cross-border e-commerce business, Vietnam has a large supply ratio. With subsequent optimization of Vietnam's supply chain and increase in supply ratio, it can also reduce tariff costs and further improve product cost performance.
Warehousing and logistics: Lay out your own overseas warehouses to reduce costs and increase efficiency, and further enhance the cost performance advantage. The company began warehousing layout in the US in '19. The east and west parts of the US have built their own overseas warehousing and logistics bases and cross-border e-commerce warehouses. Up to now, the company has more than one million feet of overseas warehouse layout in the North American region, and has accumulated nearly four years of operating experience, with significant cost advantages.
Marketing operation: Differentiate the VC model to expand cost performance advantages. Taking the company's core brand as an example, its VC model accounts for 95.2%. There is a significant difference between the VC model and the SC model in terms of operation, warehousing and marketing. Overall, due to the low commission ratio, high account scarcity, lower competitive pressure under the VC model, relatively small marketing investment, and relying on the VC model, the company can further expand the cost advantages formed by the warehousing and manufacturing side.
The TIKTOK channel layout is leading, and the expansion of the TEMU platform is worth looking forward to. In September '23, TikTok officially announced the launch of TikTok Shop in the US market, and the company immediately entered and grew rapidly along with the platform. According to Yibang Dynamics data, during the company's Black Friday early purchase period, the TIKTOK store had 3-day sales of 1.5 to 1.75 million US dollars, far ahead of second-place Wyze (about 50-750,000 US dollars). On the other hand, TEMU recently announced plans for a semi-managed model, and the company's TEMU platform expansion is worth looking forward to.
OEM: Gradually entering inventory replenishment to benefit from overseas real estate cycle restoration
The main categories of the company's foundry business include office chairs, panel furniture, sofas, PVC flooring, etc., which were affected by falling overseas demand and inventory removal in 22-23, and performance performance was under pressure. 23H1 achieved revenue of 2,225 billion yuan, +26.4% year over year, mainly influenced by Yongyu Home. After excluding Yongyu Home's PVC flooring contribution, revenue was 1.53 billion yuan, -13.1% year over year. Currently, terminal demand is stable, and inventory locations are gradually becoming reasonable. Judging from the core customer Ikea, the FY23 inventory sales ratio is 0.164 below the 19-year level of 0.171. Looking forward to 24-year interest rate environment optimization - the bottom up in existing housing sales - the transmission logic of improving terminal demand is extremely smooth. It is optimistic that improvements in the production chain will drive the improvement in furniture demand and drive inventory replenishment.
Profit forecasting and valuation
We expect the company to achieve revenue of 80.7/97.6/11.55 billion yuan in 2023-2024, up 24%/21%/18% year on year, and net profit of 4.5/5.5/660 million yuan, up 27%/23%/19% year on year. The corresponding PE is 14X/ 11X/ 9X, respectively. Considering the high growth of the cross-border e-commerce business and the current scarcity of company cards, the purchase rating will be covered for the first time.
Risk warning
Exchange rate fluctuations, raw material prices fluctuate, cross-border e-commerce business development falls short of expectations, and the pace of interest rate cuts by the Federal Reserve falls short of expectations.