Key points of investment

The company announced the 2023 Annual Report and 2024Q1 Quarterly Report:

In '23, the company achieved revenue of 3,538 billion yuan (-13% YoY), net profit of 298 million yuan (YoY -11%) and net profit of 209 million yuan (YoY -14%); of these, 23Q4 achieved revenue of 1,038 million yuan (+20% YoY), net profit attributable to mother of 87 million yuan (+72% YoY), and net profit after deducting non-return to mother of 14 million yuan (-72% YoY), benefiting mainly from domestic sales investment; 24Q1 achieved revenue of 857 million yuan (+23% YoY), benefiting from high independent brands Gradually increase and contract manufacturing Fixed, and the marginal revenue growth rate continued to improve, achieving net profit attributable to mother of 43 million yuan (-17% YoY) and net profit withheld from non-return to mother of 0.43 million yuan (+22% YoY).

OEM is still under pressure. Domestic sales and independent brand building continues to advance by region: 1) Domestic sales: achieved revenue of 892 million yuan, +7.9%, mainly due to the rapid development of independent brand business, with a gross profit margin of 22.95%, +2.59pct year on year, which increased steadily as domestic independent brands increased their share of online sales; 2) Export sales: achieved revenue of 2,635 billion yuan, -17.88% year on year. The impact of downstream warehousing pressure is still obvious. The gross profit margin was 22.79%, +3.79pct year on year, benefiting from the continued decline in RMB depreciation and raw materials depreciation trends.

By product: 1) Office chair: achieved revenue of 2,558 million yuan, -7.86% year-on-year, significantly affected by downstream warehousing, but was driven by a sharp increase in independent brands, with a gross profit margin of 25.3%, +4.05pc, also driven by an increase in the share of independent brands; 2) Sofas: achieved revenue of 537 million yuan, a gross profit margin of 15.53%, and a year-on-year +1.45pct; 3) Massage chair body: achieved revenue of 237 million yuan, -32.23%, which was greatly affected by the operating pressure of core customers. YoY -0.88pct. 4) Lounge chair: achieved revenue of 0.29 million yuan, -17.97% year-on-year, gross profit margin of 30.21%, and +4.04pct year-on-year.

By brand: 1) Private brands: achieved revenue of 713 million yuan, +66.59% year-on-year, gross profit margin of 35.94%, year-on-year. The company increased domestic market investment in 23 years, continued to promote new products, and achieved a high increase in independent brands; 2) Non-own brands: achieved revenue of 2,814 billion yuan, -22% year-on-year, gross profit margin of 19.5%, and +1.55pct year-on-year.

High investment in domestic sales is dragging down profitability, and it is expected to be optimized in 24 years

The company's gross profit margin in '23 was 22.9%, +3.5% year-on-year, benefiting from improvements in raw materials & exchange rates and an increase in the share of independent brands. The cost ratio for the period was 15.67%, +4.08pct year on year, mainly due to the increase in sales expenses ratio. The company continued to expand sales and investment to promote independent brand development. In 24 years, as the brand size and market influence expanded, the sales expense ratio is expected to decline. The management and R&D expense ratio is 9.36%, +1.05pct year over year, and the cost control is steady; financial expense ratio -1.12%, -0.77pct, corresponding to the 23-year net interest rate of 8.42% to mother, +0.15pct year over year. The 24Q1 gross profit margin was 22.1%, -0.3% year-on-year, and remained steady. The year-on-year expense ratio was 16.88%. The net interest rate to mother was 4.98%, -2.44pct year on year, due to a year-on-year decrease in non-recurring profit and loss in 24Q1.

Multi-dimensional expansion of export sales drives growth, and independent brands are developing rapidly

Export sales: The company continues to promote customer expansion, customer introduction of new production capacity and new products to drive revenue, which is expected to support 24 years of growth. In terms of new customers, the company successfully developed many important channels and major customers such as Costco and Sam's in 2023. Key major customers have achieved shipments one after another, which will contribute considerable performance increases and production capacity dimensions in 2024. The company's Vietnam base successfully entered many new categories, new customers, and new businesses. The Romanian base will successfully enter many new categories, new customers, and new businesses. The Romanian base will have positive contributions in 24 years; after many years of preparation and construction, the Romanian base will have positive contributions. Shipments will begin on 23, and there will also be increments for 24.

Independent brands: The company actively lays out and catches up faster. During the “Double Eleven” period in 2023, the omni-channel GMV of independent brand chair products increased 256% year-on-year, and the industry rankings among similar products on Tmall, JD, and Douyin platforms rose to second, third, and second place respectively. In 24, the company will continue to work collaboratively around products, marketing, and channels to strengthen the mentality of “supporting” the brand, and is expected to continue the rapid growth of its own brands.

Profit forecasting and investment advice

We expect the company to achieve revenue of 45.9/55.1/6.55 billion yuan in 24-26, +30%/20%/19%, respectively, and net profit to mother of 3.2/4.1/4.9 billion yuan, respectively, +8%/26%/21%, corresponding to PE 12/10/8X, maintaining the purchase rating.

Risk warning

Exchange rate fluctuation risk; raw material price fluctuation risk; independent brand development falls short of expectations.