Affected by sales policy adjustments, revenue remained stable, and profits were under pressure in the short term. In 2023, the company achieved revenue of 7.65 billion/+1.8%, net profit due to mother of 420 million/ -28.4%, net profit of 390,000/ -27.6%; 2023Q4 revenue of 2.37 billion/ +5.4%, net profit of 140 million/ -19.6%, net profit of non-return to mother 130 million/ -13.9%; 2024Q1 revenue of 1.13 billion/+2.3%, net profit to mother of 90 million, net profit of non-return to mother of 110 million. Based on market judgment and competitive needs, the company accelerated the development of new products to improve product competitiveness, and adjusted sales policies accordingly. The omni-channel promotion share was increased, and revenue increased slightly. The profit side was greatly affected by price factors, and there was pressure in the short term.

The proportion of smart toilets has increased, and smart toilets have achieved better growth. By product, sanitary ceramics revenue in 2023 was 3.74 billion/+6.6%, of which revenue from smart toilets was 1.56 billion/+12.5%. Considering the double-digit decline in the average price of products, the estimated volume increase was even higher. Smart toilets accounted for +1.9pct to 20.4% of revenue for the whole year; leading hardware and bathroom furniture achieved revenue of 210 million/770 million respectively in 2023, with revenue +1.5%/-4.6%, corresponding to sales volume +6.6%/+4.1% year-on-year; the revenue side is still expected to be dragged down by price decline; Revenue from tiles, bathtubs and custom cabinets in 2023 was 430 million/390,000/98 million, year-on-year, -15.8%/-6.2%/-6.4%, respectively, with varying degrees of decline.

Continuing to promote an omni-channel layout with retail as the main focus, direct management has grown significantly. The revenue from the distribution/direct management model in 2023 was 6.56 billion/ 1.04 billion, respectively, -0.8%/+20.0% year-on-year, and the direct management channel achieved rapid growth.

1) Distribution and retail: continue to accelerate channel sinking and build a terminal marketing system with stronger radiation capacity, with distribution and retail revenue of -3.5% to 2.95 billion in 2023, with a total of 17,567 terminal stores; 2) E-commerce channels: increasing investment in emerging channels such as Douyin and Xiaohongshu while deepening traditional platforms. E-commerce revenue in 2023 was +6.7% to 1.61 billion, of which direct-marketing/distribution e-commerce was +15.3%/-0.7%, respectively; 3) Home improvement channels: actively developing micro, small and medium-sized enterprise decoration with leading manufacturers and local small, medium and small enterprises cooperation, Home improvement revenue in 2023 was +9.5% YoY to $1.14 billion; 4) Engineering channel: Continuously expand high-quality core customers under risk control, with annual revenue +1.5% YoY to $1.88 billion.

Profits are under pressure in the short term, and profit improvements are expected to be brought about by cost reduction and efficiency. 2023 gross profit margin 28.3% /-4.5pct, net profit margin 5.6% /-2.3pct; 2024Q1 gross profit margin is 24.4% /-6.0pct. The expected decline in gross margin is mainly driven by price factors and low-profit orders. The sales/management/R&D/finance expense ratios are 7.2%/16.1%/6.7%/0.9%, respectively, compared to -2.4pct/+1.2pct/+0.5pct/+0.9pct. The decline in gross margin compounded the profit margin and loss in Q1. Effective repair is profitable.

Risk warning: Real estate completion falls short of expectations; domestic demand recovery falls short of expectations; industry competition intensifies.

Investment advice: Adjust profit forecasts to maintain a “buy” rating.

Considering the short-term pressure on profit margins due to the price discount policy, the company's net profit for 2024-2026 is estimated to be 4.8/566/63 billion (previous value was 88/1.08/100 million), an increase of 12%/18%/11% over the previous year, corresponding to PE 19/16/14 times, maintaining the “buy” rating.