The company released its 2023 annual report and 2024 quarterly report: 1) 2023: The company achieved revenue of 8.678 billion yuan (YoY +10.7%), net profit to mother of 429 million yuan (+80.5% YoY), net profit of 377 million yuan (YoY +84.2%); 2) 2024Q1: The company achieved revenue of 1,761 billion yuan (+20.0% YoY) and net profit of 74 million yuan (YoY +48.6%). 2023 came to a solid end with strong 2024Q1 growth.

The volume and price of mattresses have risen sharply, and soft beds and sofas have steadily recovered. In 2023, the company's revenue for mattress/soft beds and ancillary products/sofas/wooden furniture was RMB 50.17/26.61/7.70/131 million yuan (YoY +23.9%/-1.1%/-14.6%/+27.9%). In 2023, the volume and price of mattresses rose sharply. Sales volume increased by +20% compared to the same period, and prices increased by a small single digit. Soft beds and ancillary products were relatively stable. The sharp decline in sofas was mainly due to pressure on M&D sofa sales. We expect the high growth trend of mattresses to continue in 2024Q1, the steady recovery of soft beds and supporting products and sofas, and more than doubling the growth of wooden furniture under a low base. The gross margins of mattress/soft beds and ancillary products/sofas/ wooden furniture in 2023 were 38.3%/30.5%/25.6%/1.1%, respectively (compared with +1.5pct/+1.5pct/+0.3pct/+2.2pct). The gross margins of all categories increased under the optimization of supply chain management.

Offline channels are expanding steadily, and online e-commerce and cross-border growth are strong.

1) Brand: In 2023, the Xilinmen brand revenue was 5.508 billion yuan (+12.6% YoY), gross profit margin 44.9% (YoY +2.5pct); M&D was affected by downward pressure on consumption, with revenue of 411 million yuan (-24.1% YoY), gross profit margin of 28.1% (YoY -3.1 pct). We expect steady revenue growth in the company's own-brand retail business in 2023 and 2024Q1.

2) Offline: In 2023, the total revenue of the company's stores was 3,686 billion yuan (+2.0% year over year), and the gross profit margin was 45.1% (+1.7pct year over year). Among them, we expect the Xilinmen brand to grow faster offline. The company has offline channels such as specialty stores, supermarkets, home appliances, home improvement, and residential areas, and the retail network continues to expand. By the end of 2023, the total number of the company's stores reached 5,653 (+380 compared to the previous year), Xilinmen and Ximian had a net increase of 271 and 190, respectively, and M&D stores shrunk. We expect the company's offline revenue to achieve high single-digit growth in 2024Q1, with the Xilinmen brand growing faster.

3) Online: In 2023, the company's online revenue was 1,804 billion yuan (+22.0% year over year). Tmall and JD made steady progress, focusing on new platforms such as Douyin. We expect online revenue to continue to grow rapidly in 2024Q1. Benefiting from product structure optimization, the online gross margin in 2023 was 44.4% (+3.4pct year over year).

4) OEM: By accurately implementing a hierarchical classification strategy for overseas customers, we expect the revenue of the OEM business to accelerate.

5) Cross-border: The company sells products to the US and other regions through Amazon, Wayfair, Walmart, etc., and actively promotes its own brands to go overseas. Cross-border e-commerce revenue is expected to continue to grow beautifully.

6) Independent brand engineering business: The company promotes customer structure and business model optimization and improves business quality. The hotel decoration business is expected to grow steadily; in addition, with the recovery of offline travel scenarios, the hotel bedding business is expected to achieve high growth.

Under refined operation, the level of profit is improving steadily. In 2023, the company's gross margin was 34.4% (+2.0pct year on year), and the 2024Q1 gross margin was 33.5% (+1.1 pct year on year). Cost reduction and efficiency were continuously strengthened, and gross margin increased steadily. In 2023, the sales/management/R&D/finance expense ratios were +0.7pct/-0.3pct/-0.4pct, respectively, and remained stable. In 2023, the company's net interest rate to mother was 4.9% (+1.9pct year over year), and the 2024Q1 net profit margin was 4.2% (basically flat).

Profit forecast and investment rating: The company's domestic offline and e-commerce businesses are expanding simultaneously, overseas processing and cross-border business growth are accelerating, and operations are improving steadily. We expect the company's net profit for 2024-2026 to be 520 million yuan, 620 million yuan, and 730 million yuan respectively. The corresponding PE is 13.6x, 11.4x, and 9.8x, maintaining a “buy” rating.

Risk warning: Real estate decline exceeded expectations, consumption recovery fell short of expectations, and industry competition intensified.