Revenue has maintained steady growth, and increased competition has an impact on gross margin in the short term. Maintaining that “buy” rating companies achieved operating income of 7.65 billion yuan (+1.8% year over year, same below), net profit to mother of 425 million yuan (-28.4%), net profit of non-return to mother of 392 million yuan (-27.6%); 2024Q1 achieved operating income of 1.13 billion yuan (+2.3%), net profit to mother - 90 million yuan, after deducting non-return net profit of 106 million yuan. 2024Q1 losses were mainly due to a decline in gross margin of the main business in the long term This is due to reasons such as increased asset depreciation and amortization and increased inventory depreciation losses. Considering the continuing intensification of price competition in the sanitary ware industry, we lowered our 2024-2025 profit forecast and added the 2026 forecast. We expect net profit to be 4.80/5.71/656 billion yuan (2024/2025 original value was 712/847 million yuan), corresponding EPS was 0.49/0.59/0.68 yuan, and the current stock price corresponds to PE 26.0/21.9/19.0 times. The multi-factor resonance drives the company's growth and maintains the “buy” rating.

Revenue: The share of smart toilet revenue has increased steadily. Looking at home improvement and e-commerce channels simultaneously, the revenue of sanitary ceramics/faucet hardware/ bathroom furniture/ tiles/ bathtub bathroom rooms was 37.4/21.0/7.7/4.3/3.9 billion yuan respectively, with year-on-year changes of +6.61%/+1.50%/-4.56%/-15.84%/-6.15%, of which the gross margin of sanitary ceramics/faucet hardware/bathroom furniture was 28.52%/26.58%/26.77%, respectively. Smart toilets achieved revenue of 1.56 billion yuan (+12.48%), accounting for 20.43% of revenue (+1.94pct), gross margin of 30.34% (-6.14pct), and a steady increase in revenue share. By sales model, distribution/direct sales revenue was 6.566/1.04 billion yuan, respectively, -0.76%/+20.03% year-on-year, accounting for 85.79%/13.55% of revenue, respectively, and gross margin of 27.14%/33.65%, respectively. In 2023, the company's e-commerce achieved revenue of 16.1 billion yuan, +6.65% year-on-year; at the same time, the company actively grasped the changing trend of channel traffic and actively expanded the home improvement channel. In 2023, home improvement achieved revenue of 1.14 billion yuan, +9.49% over the same period last year.

Profitability: Product promotion policies led to a decline in gross margin. Marketing policy adjustments affected the gross margin ratio. The company's overall gross margin in 2023 was 28.3% (-4.5pct). The year-on-year decline in gross margin was mainly due to the company adjusting sales policies, increasing product promotion efforts through omnichannel channels to seize market share, and at the same time accelerate internal cost reduction efforts, but the impact of price factors was higher than the contribution of cost reduction. In terms of the cost rate, the cost rate for the period was 21.0% (-1.9pct), of which the sales/management/development/finance expenses ratio was 7.9%/8.6%/4.5%/0.1%, respectively, -1.6/-0.1/-0.2pct, respectively. The decline in sales expenses was mainly due to companies adjusting marketing policies according to market conditions. Starting in the second half of 2023, the dealer subsidy fee will be changed to price discounts, and the calculated dealer subsidy will be reduced. Under the combined influence, the company's net sales margin in 2023 was 5.5% (-2.3pct). Looking at a single quarter, the company's gross profit margin for 2024Q1 was 24.4% (-6.0pct); the expense ratio for the period was 30.9% (+0.1pct). The gross margin continued to decline due to promotion policies, and the net profit margin for 2024Q1 was -8.0% (-8.3pct).

Channel sinking has further increased network density, and the share of intelligent product revenue is expected to continue to increase on the channel side: the company is deeply involved in retail channels, continues to push dealers to further improve the layout of existing terminal stores, accelerate channel decline, and expand sales coverage. By the end of 2023, the company's terminal stores had increased by 4189 to 17,567 over the same period last year, successfully bucking the trend. The types of additional outlets were mainly home improvement stores and sinking channel outlets. Product side: The company is firm in the direction of product intelligence and continues to increase related R&D investment. In 2023, the company's R&D investment will still increase 0.27% to 342 million yuan over the same period last year. At the same time, it has successively launched smart products such as smart showers, smart bathroom mirrors, smart faucets, and smart bathroom cabinets with smart toilets as the core, and continues to improve the smart bathroom category. We expect that in 2024, the company will continue to promote the iteration and innovation of smart products, thereby driving the price of the company's smart products to increase sequentially and seize market share.

Risk warning: Market competition intensifies, raw material prices fluctuate greatly, and the downstream real estate industry's recovery falls short of expectations.