The company announced its FY2024 annual report, which slightly exceeded expectations: revenue of HK$18.411 billion, +6.1% YoY (RMB +10.8% YoY); net profit to mother of HK$2.32 billion, +20.2% YoY (RMB +25.5% YoY). Among them, FY24H2's revenue was HK$9.474 billion, +17.5% YoY; net profit to mother was HK$1,166 million, +41.8% YoY. Dividends and repurchases: Based on May 21, 2024, FY2024 paid HK30 cents per share, with a dividend rate of 50.7%; repurchases of HK$229 million, with a repurchase and dividend ratio of 60.7%.

Domestic sales: FY24H1 has been repaired upward, the penetration rate of functional sofas has continued to increase, FY24 sales have increased significantly, and channel expansion is smooth. FY2024 achieved revenue of HK$11.987 billion from domestic sales, +8.1% year over year (HK$10.769 billion without iron frame, +4.8% year over year), of which FY24H2 achieved revenue of HK$5.982 billion, +11.2% year over year. By category, FY2024 sofas achieved revenue of HK$7.782 billion, +3.1% year over year, sales volume of 1.120 million sets, +25.7% year over year. Of these, FY24H2 achieved revenue of HK$3,890 billion, +4.8% year over year, and sales volume of 585,000 sets, or +24.0% year over year. According to the company's announcement, the penetration rate of functional sofas in China increased to 9.7% in 2023, a significant increase of 2.5 pct over the previous year. It is expected that the penetration rate will continue to rise steadily, the scale of the industry will maintain a relatively rapid growth rate, the company will launch cost-effective products, speed up coverage of the empty market, and achieve impressive sales growth. The FY2024 mattress achieved revenue of HK$2,988 million, +9.6% year over year, of which FY24H2 achieved revenue of HK$1,497 billion, +11.9% year over year. By channel, FY2024 achieved offline revenue of HK$8.149 billion, +5.8% YoY, while FY24H2 achieved revenue of HK$4,051 billion, +11.6% YoY. As of March 31, 2024, the number of stores was 7,236, and FY2024 had a net increase of 765 stores, maintaining a multi-series store opening strategy, and continuing to increase the gap and declining market coverage. FY2024 achieved online revenue of HK$2,621 billion, +1.8% year over year. Of these, FY24H2 achieved revenue of HK$1,335 billion, -5.9% year over year. FY24's online team adjustments will continue to increase the expansion of new platforms in the future, and the growth rate is expected to gradually recover. Looking forward to FY2024, improve product layout, continue channel encryption, and stabilize same-store growth: 1) Consolidate core categories and develop multiple categories: Functional sofas revolve around patents and new materials, and increase the development of various categories such as mattresses and customization. 2) Channel sinking: New stores are gradually penetrating into low-tier cities to enhance coverage of empty markets; 3) Strengthen marketing and enhance brand image: continue to consolidate brand image through cooperation with central TV, high-speed rail, and publication of white papers on national upgrades, etc., and deeply cultivate trade-in demand to hedge against the downward impact of real estate.

Export sales: Along with inventory removal and base decline, FY24H2 export sales have been significantly restored, new product development, sales team expansion, and phased export revenue support has been strengthened. FY2024 achieved revenue of HK$4.284 billion (including iron frame), +2.3%; Europe and other regions achieved revenue of HK$1,195 billion, +2.9% YoY; and Home Group achieved revenue of HK$674 million, +10.0% YoY. Among them, FY24H2 achieved revenue of HK$2,247 million (including iron frame), +38.3% year over year; Europe and other regions achieved revenue of HK$663 million, +35.1% year over year; and HomeGroup achieved revenue of HK$376 million, +12.9% year over year. The 2023 inventory removal cycle has basically ended. Combined with the low base for the same period, FY24H2 export sales have clearly recovered. At the same time, the company itself optimizes and adjusts, increases the decline in the price band of exported products and the development of new products, consolidating customer relationships, further increasing overseas market share; expanding the overseas market sales team, increasing coverage for small and medium-sized customers and new regions such as Europe, and expanding new growth points.

Profit side: Benefiting from lower raw material costs, increased revenue scale, and improved internal quality and efficiency, profit margins continue to improve. The gross profit margin of FY2024 domestic sales was 40.4%, up 0.1 pct year on year. Among them, FY24H2 domestic sales gross profit margin was 39.6%, down 1.1 pct year on year. The increase in overall gross margin for the whole year was mainly due to ① a decline in raw material costs, with average prices of steel/leather/ chemicals/wood products -8.1%/-2.8%/-24.6%, respectively; ② strengthening dealer incentives and benefiting consumers. The gross margins of FY2024 exports to North America, Europe and other regions were 37.1% and 30.3%, respectively, +0.7pct and +6.7pct year-on-year. Among them, the gross margins of FY24H2 export sales to North America, Europe and other regions were 38.2% and 32.6%, respectively, +10.3pct and +5.9pct compared to the same period. Since January 2023, export sales to North America will basically no longer charge shipping surcharges, compounded by changes in the FOB/Landed pricing structure (some trade terms were changed to FOB during the period when freight charges were raised), resulting in no significant increase in gross margin. According to the company, after excluding shipping surcharges, the actual gross margin of the FY2024 North American market was +8.4%. The increase in gross margin of export sales mainly benefits from the reduction in raw material costs, the increase in revenue scale, and the release of scale effects. The FY2024 sales/management/finance expense ratio was 18.0%/5.2%/1.1%, respectively, -1.1 pct/-0.8 pct/+0.1 pct. FY2024 benefited from factors such as significant improvement in quality and efficiency, and falling raw material and freight costs. The company's net interest rate was +1.5pct to 12.5% year on year. Among them, FY24H2 net interest rate was +2.1pct to 12.3% year over year, and profit margin improved markedly.

Domestic sales are centered on functional sofas, continuously strengthening product strength and brand power. New categories such as mattresses and customization are gradually gaining strength, relying on supply chain advantages, continuous channel expansion, increasing coverage of declining markets and gaps, and actively embracing new channels such as online live streaming and home improvement; export business operations are mature, organizational structure optimization, product development and customer service refinement, accelerate the expansion of new customers, new products and new regions, and strengthen phased growth support.

Considering the gradual easing of real estate policies, which is expected to achieve steady growth, we slightly raised the company's net profit due to FY2025 to HK$2,600 million (previous value was HK$2,569 billion), maintained FY's 2026 net profit forecast of HK$2,868 billion, added FY2027 net profit forecast of HK$3,075 billion, and FY2025-2027 net profit to mother of 13%/10%/7% year on year, corresponding to the current PE of 10X/9X/9X. The company's dividend repurchase policy is stable, high dividends have a strong margin of safety, and the superimposed real estate policy continues to catalyze, maintaining a “buy” rating.

Risk warning: Domestic consumption is weak, and the overseas macroeconomic environment fluctuates.