Results for '23 and 1Q24 fell short of our expectations

The company announced 2023 and 1Q24 results: -4.94%/-25.72% year-on-year revenue in '23/1Q24.

Net profit attributable to mother/net profit not attributable to mother in '23 was $26/242 million, and a loss of $381/421 million for the same period last year. The company continues to promote cost reduction and efficiency, and strengthen risk management and inventory management to reduce impairment losses.

1Q24 net profit attributable to mother/net profit not attributable to mother was 0.10/0.09 million yuan, +39.63%/+32.32% year-on-year. The performance was lower than our expectations, mainly due to a significant decline in strategic engineering channels.

On a quarterly basis, the company's 1Q/2Q/3Q/4Q23 revenue was +3.55%/-2.8%/-7.6%/-10.36% year-on-year, and net profit to mother +0.07/+1.58/+1.69/ -0.67 billion yuan, which turned a year-on-year loss into profit/ +42.94%/-475.53%, respectively.

Development trends

1. The proportion of porcelain glazed tiles increased, and distribution channels continued to be strengthened. ① By category, the revenue of porcelain glazed tiles/non-porcelain glazed tiles/ceramic plates and thin ceramic tiles was +1.63%/-23.21%/-6.78% year-on-year, and gross margin was +6.90pp/+4.55pp/+1.41ppt year-on-year. ② By channel, distribution/strategic engineering channel revenue was +6.17%/-20.21% year-on-year, and gross margin was +6.46pp/+5.62ppt year-on-year. We believe that the company adheres to the strategy of “big tiles, big building materials, big homes”, adheres to the main ceramic business, increases investment in ceramic rock plate R&D to expand product categories, and continues to promote distribution channel optimization and sinking market construction, which is expected to drive steady growth in performance.

2. Reduce costs and control fees to increase gross profit margins, and net interest rates are expected to gradually pick up. The company's gross margin for 2013/1Q24/4Q23 was +5.87/+2/+4.73ppt year-on-year. The company continues to implement cost reduction and fee control to drive an increase in product gross margin. On the cost side, the cost ratio for the 23-year period was -1.28ppt, with sales/management+R&D/finance expenses ratios of -1.87pp/+0.3pp/+0.29ppt, respectively. In '23, the company reduced the scale of its risky real estate business, and sales expenses improved markedly. The company's expense ratio for the 1Q24 period was +4.36ppt, of which the sales/management+R&D/finance expense ratio was +0.72ppt /+3.64ppt/ppt year over year. Under the combined influence, the net interest rate for '23/1Q24/4Q23 was 4.5%/1.18%/-4.88%, compared to +10.61/+0.55/ -4.12ppt.

3. Build a comprehensive and multi-format channel model to save development potential, and refined management continues to drive efficiency improvement. 1) Channel construction: Accelerate the penetration of township-level markets and promote channel sinking, upgrading stores to consolidate traditional distribution channels, increasing investment in equipment companies and new retail channels, and deepening marketing strategies to help build brand strength.

2) Fine management: The company accelerates digital construction and improves the level of refined management. The production side achieves quality improvement, consumption reduction, cost control and delivery efficiency improvement, terminal optimization and upgrading application systems to improve customer experience, and improve the logistics system to enable the connection between production side and terminal. We believe that the company continues to promote channel construction, digital construction enables refined management to improve operational efficiency, and is optimistic about the company's future development prospects.

Profit forecasting and valuation

Considering the short-term pressure on home improvement demand, we lowered our 2024 profit forecast by 34% to 426 million yuan, and introduced a profit forecast of 457 million yuan for 2025. The current stock price corresponds to the 24/25 11x/10x P/E, maintaining an outperforming industry rating. Based on profit forecast adjustments, the target price was lowered by 33% to 14 yuan, corresponding to 14x/13x P/E in 24/25, with 29% upside compared to the current stock price.

risks

The decline in the real estate boom has exceeded expectations, and competition in the industry has further intensified.