Core views
The company's revenue and net profit to mother were +3.95% and +18.51% year-on-year in '23, thanks to lower raw material costs, supply chain cost optimization, and scale effects. By brand, the sharp rise in volume and price of Sophia's main brand in '23 led to an 11.0% increase in revenue. Milana increased, and Simi was under pressure in the short term. Divided channels, distribution channels have grown steadily in 23 years, large channels have optimized the business customer structure, and the overall channel has continued to gain strength (the share of revenue increased to 16%). Looking ahead to 2024, 1) the company's multi-brand strategic collaborative development, Sophia's main brand is expected to grow steadily, and Milana and packaging channels will continue to grow at a high rate; 2) The performance assessment targets corresponding to the employee stock ownership plan are that the 2024 and 2025 revenue and net profit growth rates will not be less than 10% or 20% compared to 2023, and the revenue and net profit targets can meet one of them.
occurrences
The company released its 2023 annual report: 2023 revenue of 11.666 billion yuan/ +3.95%, net profit of 1,261 billion yuan/ +18.51%, net profit after deducting non-return to mother of 1,135 million yuan/ +21.06%, net cash flow from operating activities of 2,653 billion yuan/ +94.7%, basic EPS was 1.38 yuan/share, 17.95% YoY, and a weighted ROE of 20.87% /+2.65pct. It is proposed to distribute a cash dividend of 10.00 yuan (tax included) to all shareholders for every 10 shares, with a dividend ratio of 75.5%.
Brief review
Q4 Revenue grew steadily, with impressive performance growth in 2023. 23Q4 revenue was 3.465 billion yuan/ +5.37%; 23Q3 net profit was 453 million yuan/ +15.63%. Cost reduction and efficiency combined with declining raw material prices continued to increase profitability. 23Q4 gross profit margin and net interest rate were 37.42% /+4.07pct, 9.63% /+1.81 pct. At the end of '23, the company's contract debt was 1.306 billion yuan/ +3.15%.
By brand, in 23Q4, Sophia's main brand grew by more than 15%, Milana increased, and the Simi brand is still in the channel adjustment period. 1) Sophia's main brand: 23 years of revenue of 10.552 billion yuan/ +10.96%, 23Q3 and 23Q4 revenue of 3.12 billion yuan/ +15.2%, thanks to the development of the cabinet, bathroom, door, window and wall market under the overall custom 3.0 strategy, customer order value continued to increase. The average customer unit price on the factory side in 23 years was 19,619 yuan/ +6.30%; 2) Milana: focusing on high cost performance, upgrading the “New Generation 5A Hard Core Complete Home” strategy in '23 Revenue of 472 million yuan/+ 47.24%, 23Q3 and Q4 were 152 million yuan/ +68.9%, 152 million yuan/ +22.6%, factory end customer unit price was 13,934 yuan/ +6.57%, 514 stores at the end of '23, with 176 net sales; 3) Simi: still in the adjustment and optimization stage, 249 specialty stores at the end of '23, including 212 wardrobe sample stores, and terminal stores are gradually being transformed to the entire store; 4) Huahe: 2023 revenue of 163 million yuan/ -3.6%, with a total of 276 dealers, exclusive sale With 277 stores, Huahe will continue to recruit high-quality dealers, strengthen terminal empowerment, and promote the construction of new channels such as packaging companies, bags, and e-commerce to develop new traffic.
Divided channels and distribution channels grew steadily, bulk channels optimized the business customer structure, and the entire channel continued to gain strength. 1) Retail channels (other than bulk):
23-year revenue of 10.05 billion yuan/ +3.2%, corresponding to the 23Q1, Q2, and Q3 growth rates of -7.9%, 4.7%, 11.4%, and 11.2%. Currently, about 4,000 terminal stores have been opened, covering 1800 cities and regions across the country; 2) Bulk: 23-year revenue of 1,451 billion yuan/ -4.9%, corresponding to the year-on-year revenue growth rate of -10.1%, -6%, +15.1%, and -15.9% in 23Q1, Q2, and Q3, and insisted on optimizing the customer structure of the bulk business and consolidating the development and high-quality real estate customers Cooperation, the revenue contribution of high-quality customers continues to be stable; 3) Assembly: 23 years of revenue of 1,907 million yuan/ +67.52%, accounting for 16.4% of revenue. Direct assembly and distribution are expected to be close. By the end of December 2023, the company's integrated assembly division had cooperated with 221 assembly companies, covering 185 cities and regions across the country.
Profitability increased steadily under supply chain cost optimization, and net operating cash flow increased 95% in '23. The company's gross profit margin in 2023 was 36.2% /+3.2pct, of which 23Q4 gross margin was 37.4%, +4.1pct year-on-year, due to reduced raw material costs, supply chain cost optimization, and the scale effect of the company's wooden door and cabinet business. Sales, management, and R&D expenses in 2023 were 9.66%, 6.60%, and 3.54%, year-on-year, -0.28, -0.16, +0.35pct. 23Q4 sales, management, and R&D expenses were 9.23%, 6.61%, and 3.30%, -0.9pct, -1.0pct, and +0.2pct, respectively. The company's 2023 net margin was 11.34% /+1.76pct, of which 23Q4 net margin was 9.63% /+1.82pct. In 2023, the company calculated various impairment losses totaling $315 million, including $186 million for bad debts ($151 million for each item), $42 million for inventory depreciation, and $65 million for impairment of non-current assets (mainly for Evergrande Construction).
It is estimated that 930,000 yuan and 162 million yuan will be calculated in 2021 and '22 respectively (Evergrande's accrual ratio is expected to reach 95%). Excluding impairment effects, the company's net interest rate is 13% +.
The company's non-recurring profit and loss in '23 was $127 million, including government subsidies of $56 million and fair value earnings of $110 million. The company's net operating cash flow in 2023 was 2,654 million yuan/ +94.69%, mainly due to increased sales volume and accelerated business payback.
Under the home furnishing stock market game, leading customizing companies subsequently paid attention to increasing market share. On the real estate side, thanks to the promotion of the “building guarantee” policy, the country's real estate completion side continued to achieve positive growth in 2023. In 2023, the country's housing completion area was 998.31 million square meters/ +17.0%; the total retail sales volume of furniture in the country was 151.6 billion yuan/ +2.8%. It will take 6-18 months for the customization demand on the new home completion side to be transmitted to the custom home furnishing industry, which is expected to support the demand for custom home decoration. There has been pressure since 2024, with a completed residential area of 96 million square meters/-20.2% YoY in January-January '24. In March '24, second-hand housing transactions in 16 key tracking cities totaled 7.49,000 square meters, +133.1% month-on-month and -29.4% year-on-year (up 24.2pct from the previous month).
The majority shareholders have fully subscribed to the non-public offering, and it is proposed to launch an “Employee Stock Ownership Plan” to boost confidence in future growth. The company completed its non-public offering in 2023, with 506.77 million shares. The company's controlling shareholder, Mr. Jiang Ganjun, and the actual controller, Mr. Ke Jiansheng, jointly subscribed in full in cash. The issue price was 12.11 yuan/share, and the actual net capital raised was 606 million yuan. The non-public offering capital will be used to supplement working capital and repay bank loans to optimize the quality of the company's operations. Furthermore, the company issued the “2024 Employee Stock Ownership Plan (Draft)”. The total number of shares to be transferred is no more than 11.345 million shares (accounting for 1.18%), the transfer price is 8.59 yuan/share, and the total number of employees is no more than 200 people (including 5 directors and supervisors). The performance assessment target is that revenue and net profit growth rates for 2024 and 2025 are no less than 10% or 20% compared to 2023.
Looking ahead to 2024, Sophia's main brand is expected to grow steadily, and Milana and the packaging channel will continue to grow at a high rate. The company continues to promote a full-category, multi-channel, and multi-brand strategy. Among them: 1) The Sophia brand is expected to grow steadily under the development of categories such as cabinets, bathrooms, doors and windows, etc., and the Milana brand is expected to sink into the blue ocean market, and high-quality new merchants and quick store opening are expected to continue to increase. The Simi brand begins independent investment and store construction; 2) According to the company's “2024 Employee Stock Ownership Plan (Draft)”, the performance assessment target is that the 2024 and 2025 revenue and net profit growth rate due to mother will not be less than 10% compared to 2023, 20%, revenue and net profit It is enough to meet one of the goals.
Investment advice: The estimated revenue for 2024-2026 is 130.0 billion, 144.5, and 15.91 billion yuan, up 11.5%, 11.1%; net profit to mother will be 14.6, 16.6, 1.83 billion yuan, up 16.1%, 13.2%, and 10.5%, corresponding to PE 10.6, 9.3, and 8.4x for 24-26, maintaining a “buy” rating.
Risk factors: 1) The real estate industry continues to decline: The company is a post-real estate industry chain company, and currently the main demand comes from new home renovation, which is closely related to data such as real estate completion and sales. Among them, the bulk business is directly affected by the commencement of hardcover housing, etc., and the retail business is affected by new home purchases and second-hand housing transactions, if real estate sales continue to decline, or have an impact on market demand; 2) Industry competition intensifies: custom home furnishing companies currently have many competitors in the industry, and profitability may be affected as industry competition intensifies; 3) Risk of fluctuations in raw material prices, etc.: The price of raw materials includes board, MDI, etc. If the price of raw materials fluctuates greatly, it has a direct impact on the company's performance.