Incident: Hollywood releases its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 2,225 million yuan, a year-on-year decrease of 19.78%; net profit to mother was 217 million yuan, a year-on-year decrease of 49.60%; net profit after deducting net income of 158 million yuan, a year-on-year decrease of 36.32%. Among them, in the 2023Q4 quarter, the company achieved operating income of 638 million yuan, a year-on-year decrease of 9.09%; net profit to mother was 39 million yuan, a year-on-year decrease of 22.38%; and net profit after deducting non-return to mother was 0.26 million yuan, a year-on-year decrease of 48.90%.

In addition, in the first quarter of 2024, the company achieved operating income of 403 million yuan, a year-on-year increase of 15.86%; net profit to mother of 0.13 million yuan, an increase of 5.35% over the previous year; net profit after deduction of 0.05 billion yuan, an increase of 426.10% over the previous year.

On May 10, the company released the materials of the 2023 Annual General Meeting of Shareholders.

Adhere to the implementation of the household strategy, and the steady growth of cabinet products

The company continues to focus on the core strategy of “new original+big home”, actively expand product categories, and expand and optimize all channels. Driven by the big household strategy, the company's share of household orders has been rising steadily, retail customer order values have also maintained an upward trend, and the share of cabinet products and wooden door products in the main business revenue continues to rise. By category, the company's overall wardrobe, cabinet, wooden doors, finished products, door and window products achieved revenue of 16.73/2.96/0.90/0.98/ 0.04 billion yuan respectively in '23, -12.31%/+2.85%/+2.92%/-16.28%/-86.09%. Among them, the decline in revenue from the door and window business was mainly due to changes in the business model after switching brands. The company announced a 24-year work plan at the 2023 Annual General Meeting of Shareholders: 1) The company will further enhance its brand power and adhere to the high-end brand positioning of “Master Custom Home Furnishing”; 2) will further expand and optimize omnichannel expansion and optimization to achieve the goals of strengthening retail, expanding assembly, and improving engineering; 3) will continue to accelerate the iterative upgrading of products; 4) Adjust the organizational structure to further optimize the company's resource allocation and improve operational efficiency and management level.

Deepen omni-channel management and rapidly grow large-scale business

By channel, in 2023, the company's direct-run stores, dealerships, and bulk businesses achieved revenue of 0.75/18.76/210 million yuan, respectively, -13.77%/-14.22%/+37.68%. Among them, the year-on-year increase in bulk business revenue was mainly due to an increase in the completion and acceptance of housing enterprise engineering projects during the reporting period. Specifically, 1) The company increased investment in retail channels and brand building, continued to promote the urban operation platform model, actively explore the sinking market and expand new channels, improve service levels, accelerate the globalization strategy, continuously expand its overseas market, and lay out a new layout in 9 cities in 7 countries. 2) The scale of the assembly business increased by more than 70% over the same period last year. In terms of direct home improvement, cooperation with leading decoration companies was strengthened to co-create a new decoration ecosystem through resource integration and complementary advantages; in terms of art decoration, the company held the first National Dealer Summit of Holike Art Design in 2023 to empower the assembly channel.

Profitability was under short-term pressure in '23, and cash flow improved markedly after divestment from Qianchuan. The company's comprehensive gross margin in '23 was 35.06%, down 0.09pct year on year. In 24Q1, the company's consolidated gross profit margin was 33.18%, down 2.36pct year-on-year. The forecast is related to changes in the business structure.

In terms of period expenses, the company's expenses rate for the 23-year period was 26.48%, up 4.42pct year on year. Sales/management/R&D/finance expenses were 12.89%/6.78%/5.32%/1.49%, respectively, and +2.78/+1.06/+0.32/+0.25pct, respectively. The 24Q1 company's expense ratio was 31.71%, down 4.36pct year on year, and the sales/management/R&D/finance expenses ratio was 15.31%/8.96%/5.56%/1.88%, respectively, and -1.48/-1.71/-0.54/-0.63pct, respectively. Under the combined influence, the company's net interest rate in '23 was 9.59%, down 6.49pct year-on-year.

In 24Q1, the company's net margin was 3.14%, down 0.31pct year on year.

The company's cash flow improved markedly. Net operating cash flow increased 35.26% year-on-year to 463 million yuan in '23, mainly due to a decrease in the company's cash for purchasing goods and receiving labor payments.

Investment advice: The company's household strategy continues to advance. After divesting from Qianchuan, Hubei, the company refocused on retail channels, and future performance is expected to continue to improve. We expect Hollywood's revenue for 2024-2026 to be 24.76, 27.31, and 2,988 billion yuan, up 9.34%, and 9.41% year-on-year; net profit to mother will be 2.46, 2.75, and 304 million yuan, up 13.10%, 11.94%, and 10.66%. The corresponding PE is 11.4x, 10.2x, and 9.2x, with a target price of 11.46 yuan for 24 years, maintaining a buy-A investment rating.

Risk warning: risk of raw material price fluctuations; risk of product demand growth falling short of expectations; risk of increased industry competition and potential price wars; risk of seasonal fluctuations; risk of management; risk of overcapacity.