Brand service model creates high ROE

The operating model of a brand service provider. The company's product sales are mainly made of wood-based panels, supplemented by finished furniture products. The sales model is similar to that of brand service providers, that is, the company focuses on building brands and serving dealers, and product production is carried out in an OEM manner through supplier management. Due to the pain points of the home decoration industry that emphasizes environmental protection, the company's environmental reputation can achieve a premium on terminal products, thereby achieving strong channel stickiness.

Build high ROE & cash content. Combined with an asset-light operating model, a high ROE level was achieved. In 2013, as the retail specialty store model matured, ROE continued to increase, reaching a maximum of about 30%, and the center stabilized at around 20%. Furthermore, as a brand service provider, suppliers can take up funds from suppliers up, and cash is in stock from downward distributors, so that large amounts of cash can be retained within the company system.

Kinetic energy switching, growth expectations strengthened

Channel expansion & decline go hand in hand

The small B business is a key development direction. Beginning in 2018, the company strengthened the development of the small B business, mainly a local custom furniture company. The furniture factory channel has grown rapidly in recent years, accounting for only about 8% of revenue in 2018 and rising to 31% in 2023. On the one hand, furniture factory channel development is due to customer demand for the company's brand drainage and premium, and on the other hand, it is an inevitable choice for the company to actively embrace the customization trend.

How big is Little B's furniture factory? Considering that large custom home furnishing companies themselves have strong brands and are not Bunny's target customers, the company's boards are mainly aimed at small and medium-sized furniture factories. It is estimated that if Baby Bunny board accounts for 15% of small businesses, the corresponding income for Little B will be 13.1 billion; if the share is further increased to 25%, the corresponding revenue will be 171 billion yuan, which is a significant increase compared to the current volume.

Channels are sinking, and township stores are expanding rapidly. The company began vigorously developing township channels in 2023, and pilots were carried out in Zhejiang, Jiangsu and Anhui in 2023. By the end of 2023, 744 township stores had been established. In 2024, it is expected that 6 new provinces will be added, and the 9 major provinces will be used as “points” to cover the peripheral national market, and comprehensive development of township channels will be carried out. The target is to add 1000+ stores.

Furniture in the township market is still mainly made, and the company's brand advantage is even more obvious. In addition, the company's board customization+service advantages are also expected to be more prominent to meet the needs of township service upgrades. It is estimated that the demand in the township market is about 20% of the total demand, providing an increase in growth.

Improved service and rich products. As channels expand and downstream demand becomes more diversified, the company implemented: 1) The branch system strengthens channel empowerment. In 2020, the company started building a branch system to strengthen the service capabilities of the small B channel and more refined channel management; 2) The product system is rich. Expanding from plywood to products such as veneable chipboard to meet the diverse needs of downstream customers.

Embrace the finished product and face the future. 1) Whole house customization: Relying on the brand influence and base material advantages of Baby Bunny Board, the store continues to expand, and the whole house customization business is expected to maintain rapid growth; 2) Easy Assembly promotion: Through the development of recent years, Easy Install has accumulated rich experience in finished board products, laying a solid foundation for the implementation of board customization services in township channels and other markets. 3) Yufeng consolidation: Considering the high pressure on real estate in recent years, it is expected that Yufeng Hantang may put business quality first to ensure reasonable operating profit margins and project repayment.

High dividends, looking forward to undervaluation repair

Excellent business quality lays the foundation for high dividends. The company's acquisitions have declined markedly in recent years, and the corresponding cash dividends have increased dramatically. In 2023, the company plans to pay 456 million cash dividends, corresponding to a dividend rate of 66.2%. Additionally, the company will pay a mid-2024 dividend. Considering the company's excellent cash flow performance and the increase in the shareholding ratio of actual controllers, etc., it is expected that the company will maintain a high dividend ratio in the future.

Investment advice: Considering that the company's future growth path is clear and high dividend expectations continue, we believe that the company's mid-term valuation center is expected to gradually increase. It is estimated that 2024 and 2025 will be attributable to net profit of 740 million, corresponding to PE14 or 12 times, maintaining the purchase rating.

Risk warning

1. Real estate demand recovery falls short of expectations; 2. Risk of impairment of accounts receivable; 3. Increased industry competition; 4. Sharp rise in raw materials; 5. Risk that profit forecasting assumptions are untrue or fall short of expectations.